$500 MILLION PLUS IAN 0908 VI

$500 MILLION PLUS
JFK remarked during the Cuba Crisis that it was the week he earned his salary.
It is now clear that the months between now and the end of the year will be when the Taoiseach earns his.  They promise to be the defining period of his political life. There are two tasks at least to be got right, plus God knows what may emerge from the long grass. It is probably fifty years since Ireland had need of the resolute leadership now required.
The issues looming are the Lisbon referendum and the 2010 Budget. Both will happen. What is essential is that both issues are approached in the proper manner, and prioritised, and got right. Nothing must distract from tackling these prime objectives. The extent of the furore in recent weeks on the recommendations by the McCarthy Report (“An Bord Snip”) for possible cuts in public spending give an indication of how difficult  the task ahead will be.  The McCarthy report has raised the debate to a new level of reality, by highlighting the fact that, to maintain government spending and benefits at current levels, involves borrowing more than $500 million each week. Whatever else happens, this is not sustainable and cannot go on. This figure and this fact seems to be getting through and displacing the collective denial of recent months.
The McCarthy Report has effectively established the framework for the December Budget. It has provided the Government, and the public, with a menu of possible cuts. Once the target savings figure has been identified (probably in the range of $5 billion), the budget can be fashioned by selecting from the cuts menu, supplemented with some possible extra taxation and levies (though here the scope is limited). All cuts are unpopular and some more unpopular than others. While politics is the art of the possible the government can justifiably ask its critics which cuts they favour if the current economic situation is to be addressed. In the end some cuts will have to prove less unpalatable than others.
But first there is Lisbon. What is unclear is whether and how the McCarthy report will factor into the Lisbon issue. The second referendum has been fixed for 2 October. This permits just a month of hard campaigning after the holidays. Polls currently suggest that sufficient of the electorate have come to their senses to deliver a positive result this time around. But the electorate can be fickle, moods (and votes) have changed in the last days before polling and it is essential that defeat is not snatched from the jaws of victory. The referendum must be won from the front by taking the initiative and by putting the No lobby, who are already re-hashing old arguments, on the defensive early on.
The campaign should be kept simple.  An early TV and radio Address to the Nation by the Taoiseach–sadly lacking last time—should stress the dangers of another rejection and  explain the assistance our European partners and the European Central Bank have been to Ireland over the past year. There should be major emphasis on what we will most definitely lose by voting no again.  Ireland will certainly lose Money, Power and Influence – to take up a theme cleverly exploited by the No lobby in the past. There is no percentage, and no votes, in being defensive. Significant assurances have been secured from our EU partners on the five major issues championed by the anti lobby; realistically there is nothing more to be achieved.
Ministerial speeches during the campaign should aim to get the same basic simple message across. Any literature produced should point up the relevant treaty articles and the assurances secured, in an accurate light. While there is no winning on any issue concerning Irish neutrality, points could be scored, and hard questions asked, of the opposition, about what to do about another Bosnia, should the UN fail again.   Other points which may appear relevant, such as what Europe has given us in decades past, will convince only the already committed and should be avoided as distracting from the core issue. Ditto with the issues surrounding McCarthy, beyond pointing up his major theme that borrowing $500 million per week is unsustainable and that the economic crisis would not be helped by a no vote.
The December Budget is critical for the country. The majority of economic advice is that taxation has reached its limits, hence the relevance of McCarthy.  However, the issue is muddied by the fact that a report by the Commission on Taxation, due in early September, is expected to recommend a property tax and other charges (including a possible levy on cell phone text messages, to yield up to $500 million in a year!).  Those demanding that the “rich” pay (and who therefore oppose any welfare cuts) look to this report. Even granting an immediate property tax averaging $1000 per house, and other rumoured charges, billions would still be needed.  Again, there is no quick fix. The folly of eroding the tax base during the tiger years becomes ever more apparent.
The Budget promises to be painful, controversial and politically fraught. The fact that the debate has shifted post McCarthy should help in the run up to December. It is essential that this budget does not unravel like last year’s over issues such as removal of medical cards, or the churlish paring away of relatively inexpensive programmes directed at those in special need, when a broad brush approach could have found the savings elsewhere and at less political cost. McCarthy serves up options here. There is no time before the Budget to consider adequately suggestions for new taxes (unless these are simple and transparent).  Debate on a property tax could result in a quagmire since any property tax would have to be paid from and by the same pool of punters who are paying all the taxes at present! Wrangling over an equitable arrangement could be divisive and a major distraction.
So what should the Budget contain?  On the revenue raising side I see some scope. The tax bands should be narrowed; the entry threshold lowered, spreading the pain, and the rates increased by 2% each. There is scope also for some modest increases in excise duties. On the expenditure side cuts can be anticipated in Health and Education (worth more in 2011 than 2010). Child benefit is a no-brainer; there is simply no money to sustain the current universal levels of benefit, maintained by borrowing. They should be cut (taxing or means testing is too imprecise and will not necessarily show up as an immediate saving).
Cutting other welfare payments, many of which have increased substantially in real terms since 2002, is politically unpalatable but may prove unavoidable. 3% overall seems bearable, with some tweaking. But in equity there must also be balancing savings in the public sector pay bill. Job security in this economic climate is a prize and a privilege. There will be complaints but I can see no real hardship in the introduction of a 5% solidarity levy on state employees in permanent, pensionable employment.
Bon Chance Taoiseach!

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