ANALYSIS:Ray MacSharry delivered the 1987 budget only three weeks after a minority Fianna Fáil government had been elected. It was hairshirt stuff - was it the shape of things to come next week?
UNDER CHARLES Haughey's leadership, Fianna Fáil's election strategy during February and early March 1987 was to promise more growth than under the Fine Gael-Labour coalition of the previous five years. Its election manifesto promises were predicated on 2.5 per cent growth. It also promised increased health spending. Its key billboard slogan was: "Health cuts hurt the old, the sick and the handicapped".
However, from the moment the party returned to government, it effected what its opponents described as a massive U-turn. The Fine Gael-led coalition had collapsed in January that year over Labour's refusal to sign up to hairshirt budget measures proposed by then finance minister John Bruton. Now, it seemed, there were many similarities between this and Fine Gael's aborted effort. Fine Gael's new finance spokesman Michael Noonan described it as a "larceny of our policy as put before the electorate". Within three weeks, Fianna Fáil moved from projecting 2.5 per cent growth to projecting growth of only 1 per cent for 1987.
MacSharry's budget was in fact far more draconian than what had been conceived by Fine Gael. It was unmistakably deflationary, inflicting deep cuts on public spending allied to effective increases in taxes.
The actual money figures seem minuscule now. Overall health spending was just over £1 billion per annum and current spending amounted to £6 billion, less than a fifth of what it was last year.
But the crisis was real. Unemployment had risen to almost 250,000 and the economy in contrast to European neighbours was experiencing no growth. The borrowing requirement was £1.27 billion with the overall national debt amounting to 130 per cent of GNP. Public sector pay had risen 6.4 per cent in an economy experiencing no real growth.
MacSharry did not mince his words: "People are dispirited because the economy has been on a downward path. There have been too many failures, too many missed opportunities . . . the message I have to deliver is unpalatable but is critical to the revival of our economic prospects."
And unpalatable it was. He announced deep cuts in both capital and current spending. Current spending was to be £246 million less in 1987 than in 1986, and there would be a £77 million reduction in capital spending.
To underline his resolution he gave no breaks to two sectors closely aligned to Fianna Fáil: the motor trade and construction. He removed three of the four existing housing subsidies: the house improvement grant; the £2,250 builder's grant for new houses; and the £5,000 surrender grant for local authority tenants buying privately. He offered nothing to builders in return.
There were no actual increases in income tax but new measures ensured the net effect was tax increases. He refused to index tax bands for inflation and also increased PRSI contributions. In addition health levies increased from 1 to 1.25 per cent.
In a new initiative he introduced a withholding tax of 35 per cent from June of that year on all payments of professional services to the State including medical, legal, financial, engineering and training. In effect, professionals paid by the State were being asked to pay their taxes up front.
On the other side of the coin, the Finance Minster granted a 3 per cent increase in social welfare payments, just about compensating for projected cost of living increases.
He also introduced new hospital charges with immediate effect, a £10 charge for hospital outpatients and a new £10 inpatient service to pay for hospital ward maintenance.
On public sector pay and recruitment he said that the increases paid in previous years were unsustainable and introduced a pay freeze and an embargo on recruitment.
He also introduced tough new measures to encourage the unemployed back into the workforce. A new Jobseeker programme would interview 150,000 jobless people and offer places on new course to 40,000 of them. This was also a ruse to lower the numbers working in the "black economy".
He said that if any of those interviewed had no reason for not accepting the offer of employment, it would be assumed they were not available for work and would no longer be eligible for unemployment assistance.
The paramount objective, he said, was to reduce interest rates, then 4 per cent higher than in the UK, with a view to strong growth in the medium term. As events transpired, that objective was achieved.
Harry McGee is a member of The Irish Timespolitical staff