Friday 4 December 2009

Budget blues

View from the Pew is a regular column I write for Newslink, the magazine for the Diocese of Limerick and Killaloe - this article appeared in the December/January 2009/10 issue.

Minister of Finance Brian Lenihan

Can you visualize €1,000,000,000?
Ireland is in an economic mess – commentators, politicians and interest groups all keep telling us so. The Government promises us a harsh budget, and says that if we take the nasty medicine now we will all be better for it. Figures of billions of Euro in budget cuts and/or higher taxes are bandied about – on top of billions to recapitalise the banks, and yet more billions for NAMA. It is all quite bemusing, isn’t it?

€1 billion = €1,000,000,000

One billion 1 Euro coins placed end to end stretch 23,250 km

That’s more than 100 times the distance from Limerick to Dublin

€4 billion would fill one carriageway of the Limerick to Dublin motorway with 1 Euro coins

The hole we are in
As a citizen of this Republic, I feel I should try to understand our situation. So I have just been reading the November 2009 Pre-budget Outlook published by the Department of Finance – you can download it free from It summarises the context in which Minister of Finance Brian Lenihan will frame his budget for 2010. To my surprise it is quite easy to read, and at just 30 pages a good way to get an overview of our economic woes, even if it is rather depressing. For me, the key facts are these:
  • National output (GDP) has fallen by around 7.5% this year and is expected to fall by another 1.5% in 2010. Unemployment has soared; pay rates have fallen (in the public if not the private sector); prices are falling; consumption is falling; savings are up; investment is minimal.

  • The government deficit – the difference between what is raised in taxes and what is spent – has ballooned to around €20 billion in 2009, largely because tax revenues have collapsed and social welfare payments to the unemployed have surged.

We are faced with a classic deflationary spiral, like the great depression in the 1930s. Keynes’ remedy then was increased public borrowing and spending, to put people back to work and stimulate demand, leading to renewed confidence and a return to investment and growth. This is what other countries are doing now with stimulus packages, and it is what our government has been doing too, by increasing the government deficit.

But the Government says this can’t go on, because even if financial markets would keep lending to us, paying them back would cost too much. Last April they declared they would reduce borrowing by €4 billion in 2010 and another €4 billion in 2011, in order to get borrowing down to 3% of GDP by 2013. Most economists and politicians seem to agree that this scale of adjustment is necessary, though the trades unions argue that the adjustment should be over a longer period. I for one am persuaded a €4 billion adjustment in 2010 is appropriate.

How to reduce borrowing by €4 billion?
But the big question is how to do it. I believe our Christian faith demands social justice – a ‘preferential option for the poor’, in the phrase used by liberation theologians. Can there be any doubt that Jesus calls us in solidarity to protect the poor and the vulnerable?

I am therefore dismayed by the media chorus, on the one hand urging cuts in social welfare for the poor and vulnerable because consumer prices are falling, while on the other asserting that the well off cannot afford to pay more in taxes. Both arguments are nonsense, I think.

First, basic living costs for those on social welfare have not dropped as they have for other groups. Most of the fall in the price index is due to lower mortgage interest rates, but few on social welfare have mortgages, so cuts in line with the index would cause real hardship for those already struggling. St Vincent de Paul points out that the planned removal of the Christmas bonus already represents a 2% cut, at a time of year when poor families need to spend more on basics such as heat, light, food and clothing. A new carbon tax is expected in the budget. This will promote the transition to a low carbon society which we must make to avoid climate change catastrophe, and I am in favour of it. But the poor spend more of their income proportionately on high carbon fuels. Without compensating measures a carbon tax will increase fuel poverty. Social justice requires benefits to be raised, not cut.

Second, those who are well off are well able to pay more in taxes to help out their less fortunate fellow citizens struggling to live on social welfare. Most of those who profited from the bubble economy remain very rich. Sean Quinn, for example, has been able to pass €200 million to his four children this year, despite his losses in the collapse of Anglo Irish Bank. Salaries for Irish professionals, such as doctors, lawyers, business managers and government ministers, remain very high by international norms. Such people will suffer no hardship if asked to pay more. Those who suggest they would skip the country to avoid tax are arguing that we should give in to blackmail, as well as impugning their patriotism.

But more than this, income tax rates for those of us lucky enough to still have good incomes are very low by international standards, as Garrett Fitzgerald has been arguing. Most Irish taxpayers pay tax on income at rates between a quarter and a half of the rates in other western European countries and the USA. Even at higher income levels our rates are still a quarter lower than these other countries. These low rates of tax on incomes are a result of grossly irresponsible government decisions during the boom to fund cuts in income tax from stamp duties and capital gains tax arising from the housing bubble. If we want to enjoy decent health and education services and an acceptable social welfare safety net, we must all be prepared to pay more in tax. And ways must be found to relieve the interest burden on ordinary families who were persuaded to take out mortgages to pay absurd stamp duty on over-priced homes.

Back in April Brian Lenihan appeared to accept this, saying he would raise €2.5 billion in increased taxes in 2010, with a more manageable €1.5 billion in expenditure cuts. More recently he has been saying the whole €4 billion must come in cuts. Is he really preparing to throw social justice to the winds in budget 2010?

And what about overseas aid?
Social justice must not end at home. It should also apply to the poorest of the poor in the developing world. My own key test of Budget 2010, as it was last year, is what happens to development aid.

Ireland has a proud record for overseas development aid. Like all rich countries we promised to increase development aid to 0.7% of GNP to achieve the UN’s Millennium Goals, which include eradicating extreme poverty and hunger. By 2008 we were the sixth highest per capita donor, giving 0.58% of GNP, on track to meet our commitment to achieve 0.7% by 2012. I awarded Brian Lenihan a cheer in October 2008 for protecting the overseas development budget for 2009.

But what has happened since then? The overseas aid budget has been cut by 24% since February - three times higher than the fall in GNP. This year, for the first time, 1 billion people are going hungry. This shames us all – our government has shamed us! To their credit, 30 TDs and Senators from all parties wrote to the editor of the Irish Times on 14th November earnestly calling on the Government not to cut overseas aid any further. I pray that Brian Lenihan will listen to them, and even restore this year’s cuts.

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