Monday, December 6, 2010

Review of Labour’s proposed Budget

Ahead of Tuesday’s Budget, Labour published their own budget proposals last Friday.  These were greeted with much acclaim in some quarters.  I am far more sceptical.

You can read my response to this Irish Examiner article and Labour’s proposals below the fold.

An article in The Irish Examiner (04/12) reviewed the budgetary proposals of Fine Gael and Labour that had been released the previous day. The piece ‘Labour’s proposals are fair and more promising of an economic recovery’ reviewed the Labour Party’s policies in glowing terms using words like appealing, commendable, fair, balanced, excellent and progressive.

The article lists a whole series of Labour’s “proposals” which he says are “likely to appeal to more voters” as they are not “weighted towards spending cuts”. It is clear that the author did not have access to the survey on the budget carried out by The Irish Examiner which led with the front-page headline “Leave taxes alone and cut spending, warn public” the same day.  Maybe they’re not appealing after all.

In 2010, central Irish government will spend €68,800 million, and with an income of €50,000 million this means we face a budget deficit of nearly €18,800 million. Labour proposes a plan to close this huge gap with €4,538 million of adjustments in 2011, many of which are questionable. Labour has not produced a multi-year plan so we do not know how they actually propose to cut the deficit in full.

This €4,528 million is made up of €1,200 million of unspecified capital expenditure cuts, €1,360 million of current expenditure cuts and €2,478 million of tax increases, with €500 million of these adjustments being used to provide a “jobs fund”.

Current expenditure by central government in 2010 will be €61,200 million. Labour proposes to reduce this by €1,360 million or 2%, but the reality will be much lower than this.

There are €400 million of proposed savings from the public sector reform agreed as part of the Croke Park Deal. This deal has yet to produce any savings for the Exchequer and with no proposed public sector pay cuts or accelerated reduction in public sector numbers in Labour’s plan it is hard to know how these savings can be achieved.

Then there are €960 million of “non-pay expenditure savings”. Labour only provide for €250 million of measurable current expenditure cuts. The largest of these are cuts of €52 million from subsidies to agriculture, €6 million from the budget for TG4, €84 million from the fees paid to dentists, pharmacists and doctors, €15 million from the Horse and Greyhound Racing Fund and €65 million from the restructuring of rent supplement (though we are told that rates will not be cut). No further expenditure cuts are proposed.

Many of the announced savings see expenditure by one body replaced by revenue from another. Several others listed under savings are actual revenue raising measures such as charging more for private beds in public hospitals and have nothing to do with expenditure.

The remainder of the announced cuts from anomalous headings like “operational efficiencies”, “administration savings”, “miscellaneous”, “programme savings”, and “procurement savings”. These have no actual meaning, and are neither measurable nor deliverable. These “savings” form part of the budgetary plans of all the main parties but we have no way of knowing what they actually are.

Labour have announced no material cuts in current expenditure in excess of the €250 million listed above. This amounts to 0.36% of current expenditure with 99.64% left virtually untouched.

Labour’s tax increases focus heavily on Income tax and the property sector, with some minor increases in Excise Duty through an increase in the Carbon Tax. There are €1,115 million of proposed increases to Income Tax across a range of measures such as reduced pension reliefs, reduced personal credits and increased DIRT.

There are €604 million of tax increases on the now stagnant property sector. Clearly, Labour wish to distance themselves from the property-led bubble of the last few years, but this is a bit like arriving to break up a party long after all the guests have left.

Labour suggest that an additional €240 million can be raised by restructuring the rates and thresholds of Capital Gains Tax and Capital Acquisitions Tax. This will be quite an achievement considering these taxes have brought in a combined €394 million so far this year.

The final part of the tax package hope to see €180 million of Excise Duty raised from “a determined anti-smuggling drive, as proposed by the Irish Cancer Society” and €100 million collected from tax exiles that are not tax-resident in the State. These are not actual taxation measures and again are difficult to measure and deliver.

In 2009, in spending nearly €70 billion, Irish central government:

  • Paid out €28.4 billion in transfer payments to people;
  • Paid €16.6 billion to its current and former employees;
  • Bought €7.1 billion of goods and services;
  • Transferred €6.7 billion to local government;
  • Spent €6.3 billion on capital projects;
  • Paid €3.2 billion in interest to service the National Debt, and;
  • Provided €0.8 billion of subsidies to agriculture, businesses and public transport.

All sides agree that expenditure must be addressed as part of the solution to our €19 billion budget deficit. However, if a proposal suggests that expenditure cuts are part of the solution (and Labour indicate that they want half the adjustment to come from expenditure cuts) unless that proposal has significant elements of all, or many, of the following it cannot be considered a credible solution out of this mess.

  • Give out less money in transfer payments.
  • Pay current and retired public servants less.
  • Buy fewer goods and services.
  • Reduce grants to fund local government services. 
  • Build less infrastructure.

Bar the last, and lowest, of this list, Labour’s proposals fail to address the key expenditure issues and, in my opinion, are merely a populist attempt to appear progressive but fall far short of what is needed.

Labour do have some realistic tax proposals, and they may have had an arithmetically credible plan if these measures were extended. But that wouldn’t have been popular and their wafer-thin attempts at expenditure cuts mean that this is a lightweight plan that is doomed to failure.

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