Claims of end to austerity have been exaggerated

The notion that some kind of an historic turning point is in sight is overdone

Having promised to govern more from the heart, Ms Burton might want to reserve some of the excess funding in her department for welfare concessions. Photograph: Cyril Byrne
Having promised to govern more from the heart, Ms Burton might want to reserve some of the excess funding in her department for welfare concessions. Photograph: Cyril Byrne

Beware claims that the end of austerity is nigh. There may be but a small increase in the rate of retrenchment when Minister for Finance Michael Noonan unveils the budget next month but the State’s fiscal stance will remain austere for years to come. The notion that some kind of an historic turning point is in sight, as mooted by Tánaiste Joan Burton, is overdone.

The negotiation starts in earnest next week. Ministers want to cut income tax a little but their original spending submissions would have increased total expenditure by €1.5 billion in a no-change scenario. They will have restrain their ambitions. Tax revenues are well ahead of target so there is some flexibility, although this is highly limited. Concerned to contain the public clamour for a giveaway, the Government is campaigning to damp down public expectations. An appreciable cut in the budget deficit is also required.

In the middle of the crucible stands Mr Noonan. Beside him is Brendan Howlin, Minister for Public Expenditure. Together they must fashion a plan that goes some way towards meeting all of these objectives. A "neutral" budget is in prospect, but that essentially means that any tax concessions must be paid for with new tax receipts. The same goes for any new expenditure, the quid pro quo being that fresh cuts must be made elsewhere. The end of austerity it is not.

As in previous budgets, measures previously published but not yet in force will have a bearing on the calculus. This includes, most notably, €500 million in receipts from the water tax, which is to be paid next year for the first time. It is through this very prism – not to mention the property tax – that any small income tax concession would be viewed.

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Noonan has also pledged to cut the private pension levy in 2015 to a 0.15 per cent charge on the market value of fund assets from a total levy this year of 0.75 on fund assets. The projected yield this year amounts to €675 million, a huge surcharge on workers’ pension savings. If that figure turns out to be accurate and if Noonan proceeds as set out last year, pension-levy receipts next year would drop by €540 million. This is budget neutrality in motion, the net gain from water cancelled out by the promised pension levy cut.

Expenditure this year will also have a major bearing on the talks. Within the big three spending departments accounting for 80 per cent of expenditure – health, social protection and education – the major problem is in health.

Thanks to a large spending overrun, Minister for Health Leo Varadkar says he will need a supplementary budget estimate of €500 million to balance the books this year. Varadkar’s public airing of the problem prompted a rebuke from Taoiseach Enda Kenny but the problem remains.

This brings us to Ms Burton’s social affairs department, which was €137 million below target in the first eight months of the year. At issue is whether some of the Tánaiste’s unspent funds are diverted into health. Common sense suggests this will happen to an extent, but this is a still a tricky political situation.

Having promised to govern more from the heart, Ms Burton might want to reserve some of the excess funding in her department for welfare concessions. This feeds into the perceived requirement to look out for the interests of pensioners in the budget, which all the more necessary if modest income tax cuts are in play. This is in the interests of both the Labour and Fine Gael camps in the Coalition, so the scope for any welfare bailout of the health budget is uncertain.

There is more. Remember Burton’s remarks in May to the effect that there should be no further welfare or education cuts – and that the focus should be on health service reforms. This was a warning shot to Fine Gael, which argued Burton should do more to reform the welfare system. Such pressure remains, though falling unemployment helps her greatly.

There is also the matter of education expenditure, which is more or less on target this year. However, the system is under demographic strain and there are signs of rising demand for school transport and special needs assistants.

In sum, the arithmetic will be exceedingly tight. Good news will be accompanied by bad news. It may not be as bad as it was, but we’re not quite in the clear.