SEVERAL BILLION in savings have been made since July, 2008, when the Government introduced the first of a series of austerity measures to stabilise the public finances and to close the gap between revenue and spending. A further €3 billion or more in spending cuts and tax rises are in store for the forthcoming budget on December 7th.
Minister for Social Protection Éamon Ó Cuív let the cat out of the bag recently when he mentioned the figure of €4.3 billion so it is a fair guess that that is the Coalition Government’s real target. The extra savings are seen as necessary if the Government is to meet the target agreed with the European Commission under the Stability and Growth Pact to reduce the budget deficit to 3 per cent of GDP by 2014. And now we know that officials from the commission have been looking over the Government’s shoulder in Merrion Street this week.
At stake in these efforts to achieve fiscal consolidation is the State’s creditworthiness, its credibility and, ultimately, our sovereignty. A failure to demonstrate through the fiscal plan and the budget measures that we can and will reduce the deficit will adversely affect our borrowing capacity. How the Government’s proposals for fiscal consolidation are viewed abroad will determine how much we can borrow and at what cost; or indeed whether we can borrow at any price from foreign investors who currently own nearly 90 per cent of outstanding Irish government debt.
This newspaper carried out an academic exercise in the Graphic of the Week, published yesterday, to demonstrate the scale of decisions required to arrive at €4.3 billion in savings. This is not an Irish Timesbudget. The adjustments required in 2011 to secure savings of over €4 billion are daunting politically and not made any easier by the prospect of a general election, possibly with a matter of months
The harsh economic reality is that finding more than €4 billion in budget savings will be painful, however public spending is cut or taxes are raised. To increase the standard income tax rate (20 per cent) to 22 per cent and the higher (41 per cent) rate by 1 per cent would bring in just over €1 billion in a full year. A 5 per cent increase in the higher rate of income tax would yield €630 million. To reduce child benefit by 20 per cent would save €450 million while a €10 a week reduction in unemployment benefit would save slightly more. Reducing the old-age pension payments by €5 a week would save €126.5 million.
The Government must decide how to balance the adjustments in an equitable way that is transparent to all voters. Fianna Fáil and the Green Party will make the policy choices. But it would be helpful to the national interest internationally if Fine Gael and Labour were to sign up to the sum of the annual adjustments.
To govern is to choose, and making necessary cuts will involve very unpalatable decisions. The European Commission must appreciate that the essence of democracy is that we are presented with political choices about the cuts.