The following are edited extracts from the section of the memorandum dealing with the cost of services and budgetary proposals from 2003 to 2005.
Cost of existing level of service 2003-2005
15. As agreed by Government on March 26th, 2002, the Department of Finance has undertaken an in-house exercise to identify the cost, based on up-to-date inflators and other technical parameters, of continuing to provide the existing level of services (ELS) over the period 2003 to 2005 .....
16. These projections .... do not allow for the cost of incremental improvements in health service initiatives already under way, let alone implementation of the Health Strategy. Neither do they allow for the usual budget day package for social welfare (except indexation to prices) or for any further pay increases on expiry of the PPF (including benchmarking). No allowance is made for either additional ODA expenditure or for projects such as the Metro.
17. The Minister's strong view is that issues such as these should appropriately be considered by Government as part of the estimates/ budget process, rather than being "decided" in a technical multi-annual costing exercise. It is essential that the Government retain as much room for manoeuvre as possible at this stage in the process.
DETAILED BUDGETARY PROPOSALS 2002-2005
The next national agreement
18. The public service pay agreement under the PPF is due to expire at the end of June 2003. Talks with the social partners on a new national agreement to replace the PPF are expected to take place this autumn.
The Public Service Benchmarking Body is due to report by June 30th, 2002. It has been agreed that one-quarter of any increases recommended will be implemented with effect from December 1st, 2001, with the implementation of the balance to be negotiated between the public service employers and trade unions.
These negotiations are expected to run into and in effect become part of the national talks. On previous experience discussions could run up to, and possibly through, budget 2003.
Medium-term framework for taxation
19. Because of the need to preserve scope for sufficient capital expenditure in the context of the budgetary targets outlines, and pressures (in particular from prospective pay developments) on current expenditure, the proposals incorporate budget tax packages which are broadly revenue-neutral.
These are based on fully indexing excises (on average) to consumer prices, yielding revenue sufficient only to raise personal income tax credits and bands also in line with consumer prices (hence, involving some fiscal drag) - with full year costs of approximately €250 million in budget 2003, €200 million in 2004 and €175 million in 2005.
It is also assumed that the rate of corporation tax will be reduced to 12.5 per cent by 2003 as provided for in legislation.
The provisions will not allow progress on exempting the minimum wage from income tax or progressive widening of the standard rate band, nor contribute to easing inflation through under-indexation of excises.
Budget day spending envelope
22. The following areas need to be provided for within a budget day spending envelope:
- social welfare budget package
- health and
- infrastructure.
Demand under these heading could be as high as €1.5bn (over and above indexation of social welfare) Last year's comparable budget day spending was €2bn.
Provision for future pay increases
23. No provision is included in the €1.5bn for pay increases/benchmarking. The costs of benchmarking and any post-PPF pay increases are difficult to quantify at this point. However, each 1 per cent addition to pay rates will cost approximately €115 million in a full year.
The Minister has recently briefed his Government colleagues in relation to public service pay issues.
Reduction of €900m required off ELS (Existing Level of Service)
24. Given that the scale of potential budget day requirements is significantly ahead of available resources, it will be necessary to create additional space to fund a budget package which would meet a number of pressures above.
In the light of the foregoing, the Minister proposed that Government agree that Departments be requested to submit pre-budget Estimates for 2003-2005 which, for 2003, are €900 million below the ELS in order to generate sufficient flexibility for a budget day package. Securing this €900 million reduction will require policy changes to be made.
25. The Minister for Finance recognises that there is limited scope to achieve cuts below the existing level of service in relation to the existing costs of public service pay and pensions.
He also recognises the need to respect the Government's stated priorities in the health, social welfare and transport areas.
26. Taking account of these priorities, the Minister proposes that the €900 million target for reduction of the ELS be distributed on the basis set out in Annex 2. an accompanying document to the memo ...
27. Any expenditure above €1.9bn on budget day would have to be funded by revenue-raising measures. As this amount must cover benchmarking and other pay increases (with a cost of €115 million per 1 per cent pay-rate increase), it would be difficult to meet the expected budget day demands without significant additional taxes or charges.
28. While the Minister accepts that this approach will cause difficulties for his colleagues, the spending increases now proposed are at the outer limit of what is prudent and will only be possible if the international recovery is sustained and there is no major change in exchange rates.
The reality is that spending increases at the pace of recent years are no longer possible. Increases in spending above those outlined would compromise the basis for economic growth and social progress going forward, and would force a major reversal of the thrust of tax policy of recent years.