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Ireland Calling with John Spain

Waking Up to a New Reality

October 15, 2008

Ireland Calling by John Spain

TUESDAY, October 14, was Budget day in Ireland. And as I write on Tuesday evening, like everybody else in Ireland, I am recalculating my personal finances after the toughest Budget we have seen since the eighties.

It’s not an easy calculation because apart from a few headline changes, much of the bad news is contained in minor adjustments across a very broad range of tax measures. It is going to hit me and my family by adding somewhere between 5% and 10% to our bills.

The first big one is a new 1% levy on top of income tax on all income below €100,000 and 2% on income above €100,000. There are increases in tax on investments and in sales tax. And there are increases in tax on tobacco, alcohol and running a car, among many other things.

There are also cutbacks in the way the government spends money, much of which are aimed at middle-income families. There will be new limitations on entitlements to child benefit and childcare supplement.

The cost of college education is going to go up. And the amount of tax you can claim back for medical expenses is going to be cut.

These, and many other changes, are going to make life here more expensive for almost every family in the country except for those on welfare.

One change that is going to cause uproar here is the abolition of the automatic entitlement to a medical card for the over-70s, which gave the old folk free medical care.

Why the harsh measures? And why are we having a Budget in October?

Normally the Budget would be presented to the Dail (Parliament) in December, but it was brought forward this year because the government realized a couple of months back that the state finances were going out of control so fast that immediate action was necessary. Waiting until December was not an option.

By the end of the summer it had become clear there was a catastrophic and accelerating decline in tax revenue, mainly due to the property market collapse. The gap between falling tax revenues and soaring state spending had got so wide that corrective action had to be taken as soon as possible.

So an early Budget was announced. And remember, all this was decided long before the global financial meltdown happened, which has made the bad situation in Ireland even worse.

So we all knew this was going to be a stinker of a Budget, which is exactly what it has turned out to be, especially for middle income families. You can see the main tax increases and spending cuts in the Budget in the news pages of the Irish Voice. For people here it makes painful reading.

The big question people in Ireland are asking themselves now, as they work out how much they and their families are going to be hit by the tax and spending changes, is why such a draconian Budget was unavoidable.

We are all working just as hard this year as we did last year and we haven’t changed the way we live, so why are we being crucified in this way? What did we do to deserve this?

The answer, of course, is that on an individual level most of us have done nothing wrong and the crisis Ireland is in has nothing to do with us.

But on a national level it’s a different story. On a national level we have been living way beyond our means and we have been wasting vast amounts of money.

We were able to do that for the last decade because during the Celtic Tiger years as the economy boomed tax revenues flooded into government coffers. The government was awash with money, so much they could hardly spend it fast enough.

Some of it was put into a national pension fund which was good. Some of it went into infrastructure like motorways, which was also good.

But most of it was blown on day-to-day state spending, supposedly to improve services for the public. In fact we can now see that most of the money went on new agencies and a huge increase in the number of people on the state payroll, and that services did not really improve all that much.

The picture is complicated by the fact that our population was growing quickly in the same period, so there was a need for extra spending on state services for the new people, both native and immigrant. The result was that state spending on day-to-day services has almost doubled since 2000.

But looking back now it is clear that most of that money went on extra state workers and higher pay in the state sector. At the front line, whether it was in transport, or schools, or hospitals, or in many other areas, service levels did not appear to improve at all.

Services did not improve because promised improvements in productivity among state workers was never delivered. Yet the bills for the state sector soared.

Workers in the rest of the economy, facing intense competition in global markets and jobs being lost to Eastern Europe, had to modify pay demands. But workers in the state sector, the only sector where unions remain very powerful, demanded and received big pay hikes.

One example will illustrate the nonsense that went on. State workers have guaranteed pensions, something that is now rare in the private sector.

But the level of state pensions for many state workers is not two-thirds of their final salary, but two thirds of the salary of whoever is currently doing the same job. So you can have a situation where a civil servant who retired 10 years ago is now getting more in pension than he got in pay in his last year in the job!

All of this has meant that the bills facing the government for services in the state sector soared in recent years. On top of this, because there was so much tax revenue money pouring in, the government also blew vast amounts of money on new state agencies and organizations.

If there was a problem to do with immigration or the environment or dozens of other areas in our new Irish society, the answer was to set up yet another quango to deal with it.

If it was one of those politically correct areas of sensitivity like equality or racial integration, it was a great way of getting it off the department’s desk. You set up a new agency with plush offices, lawyers and lots of staff and let them worry about it.

An unbelievable number of these quangos were set up here over the past decade — approaching 200 of them — and since they were independent of state control, the costs went up and up. Now we are looking around us and asking why we need all these organizations when we seemed to manage perfectly fine without them in years gone by.

So it’s not a surprise that in the Budget the government has announced that it is to abolish over 40 of them.

All of this overboard spending in the state sector was bearable when the economy and tax revenues were flying high. Now that the economy is in recession and tax revenue is sliding fast it is a real problem.

Because, of course, once you hire all these workers and set up all these quangos and expand state services into areas that never existed before, it is very difficult to reverse the process.

The situation faced by the government as a result is horrendous. As recently as 2006 there was a budget surplus here of over €five billion. But now tax revenue, which was heavily dependent on various property taxes, has collapsed.

Instead of a €five billion budget surplus this year we will have a €seven billion budget deficit. And the predictions for next year were even worse, with a predicted €15 billion deficit.

The budget changes are designed to get this back to around €12 billion, or 6.5% of our GDP. That is still double the EU guideline of 3%.

But a deficit any higher than that could have seen us being dumped from the eurozone. So the government HAD to act to get the deficit down. And the only way to do that was to raise taxes and cut state spending.

And that is why we have now had to swallow the most bitter budget we have seen in two decades.

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