At least we
had a fine early summer. In July, however, the rains returned and combined with
doom and gloom in the media about our current travails to dampen the most
optimistic spirit. It is now apparent to all that there will be no quick
economic fix. The sands are running out for the Government and Fianna Fail
continues to languish at unprecedented lows in the polls.  The focus is now on
the next dose of pain – the December budget – with around $2 and a half billion
to be found from extra taxes or cuts in spending. It could be the Government’s

Several recent economic reports, even those positive in tone, have
underlined just how fragile our economy remains and how much pain we have still
to endure. One or two outside commentators have been scathing about what has
been done and sceptical about any chance of a quick recovery. An exasperated
Taoiseach has complained about too much negative reporting which does no good
and could harm the recovery.

Certainly there are positive signs,
particularly regarding exports and in terms of a pick up in foreign direct
investment. The Government has bravely committed itself to a future capital
programme, which, even scaled down, contains the promise of future jobs.  Jobs
are being created, but jobs are being lost. Unemployment has begun to lurch
upwards again.

Fresh revelations about the misdeeds of the banks (and
bankers) continue, serving to drive home the  feeling that too much has been
done for them. All the signs, moreover, are that the banks, far from being
grateful, are, rather, turning the screw on customers whenever the opportunity
is presented. The end September sees the current state guarantee to the banks
expire; will there be a rethink for guarantee mark two?

There is a
reluctant general  acceptance among  all but the most obtuse that we cannot
continue to borrow at the current levels. It has dawned on the public that the
core issue is not to win an internal argument among ourselves about appropriate
welfare and tax levels but rather to convince outside lenders to continue to
advance us the money to fund our current living standards. No amount of outrage
over the huge sums sunk into the banks – particularly Anglo Irish – can obscure
the reality that we are borrowing a similar amount every 18 months or so just to
keep afloat.

The budget will not be easy politically; the Government,
relying on independents and some worried schismatic supporters,  may fall over
it. The result would be an election but out of that would have to come a
successor obliged, however reluctantly, to meet the same targets. Whenever the
next election occurs the new government will have its hands tied.There are
echoes of 1987 in all of this, but though  much groundwork has been done over
the past two years recovery still seems a distant prospect.

A number of
budget trial balloons have already been launched covering welfare cuts
(including one of the last sacred cows, the old age pension), extending income
tax to the lower paid (half of all workers pay no tax) and the modalities of
interim property and water taxes (the definitive versions will take longer to
formulate). In a sense this is the Government version of negative spin – a
softening up process to make the final package more palatable. The first result
has been to alert the lobbies.

So what will the budget
contain? Much of last year’s McCarthy Report remains to be implemented.
However,the Government, through the Croke Park Agreement with the public sector
unions, has tied its hands regarding further cuts in public sector pay or
levies. Some big spending Departments will be targeted. Mary Harney has already
signalled a draconian cut in the Health budget. This has been received
relatively quietly, though this will probably change as the details emerge. The
public is weary of a system  whose strengths and weaknesses are well known; any
cuts aimed at the top heavy bureaucracy will be welcomed; any cuts in services
will draw fire.

Education seems destined for further cuts but here most
of the soft options have already been targeted. One issue remains – that of the
reintroduction of third level fees at the state’s universities and colleges.
When the emotive smokescreens are stripped aside, the simple reality is that the
main beneficiaries of the abolition of fees have been the middle classes. Some
others have benefitted but not to the same extent. In practice, access is
limited overwhelmingly to the well off or those accepted by a third level
institution close to home. Whether this nettle will be grasped may ultimately be
decided on political grounds.

Small savings can be effected in most
other departments. To meet the target, however, will require additionally a
combination of revisiting the social welfare budget and extra taxation. Last
year’s cuts breached the taboo except for the old age pension. A change here was
floated some weeks ago, specifically in the context of “better-off” pensioners,
but given that these are taxed in any event, it is difficult to see where this
one is going. The emotive argument that the pension was earned through
contributions when working remains particularly potent.

Clear signals
have been given about “widening the tax net” to bring in some of the 50% not
paying any tax. This mainly means the lower paid and can be done easily by
lowering tax thresholds. This will also increase the amount paid by those
currently paying tax, which may forestall or postpone any property tax right
away. The glib alternative solution for raising revenue by a tax on property, or
assets, conveniently ignores the fact that those obliged to pay are likely to be
mainly those currently paying income tax – ie the middle classes – who can only
be squeezed so far.

While some form of property tax, which would broaden
and make more sustainable the tax base, seems bound to come, when and in what
form is another matter. There remains in Ireland, almost uniquely in the first
world, a general reluctance to take on board the principle that ownership or
beneficial use of a piece of property should carry with it a cost. The
Government has hinted at the need for further study, and, fearful of a further
political backlash, may settle for the moment for a low uniform levy, with
another one on water.

Any taxation of the lower paid runs the risk of
adding to the existing poverty traps which can make it more advantageous to
remain on welfare rather than work. To maintain relativities and avoid a
worsening of the situation the Government may be tempted to cut unemployment
assistance again in a package that in equity should also include a hefty cut in
child benefit, currently paid indiscriminately to all. There is surely fat in
the latter and this could give scope for some rowback on cuts already made for
certain particularly vulnerable groups like carers, special needs assistants and
the blind. Even lacking money, the Government could and should do something to
protect those most vulnerable.


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