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 http://www.finance.gov.ie/viewdoc.asp?DocID=6087. 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.

A View from the Pew - Judging the Budget

View from the Pew is a series of articles I am writing for Newslink, the Diocesan magazine for the Diocese of Limerick and Killaloe. This one appeared in the November 2008 issue.

The morning before
I am writing the morning before Brian Lenihan’s first budget as Minister of Finance. We all know it will be harsh, because government spokesmen have been continually telling us so for weeks. No doubt they are managing our expectations to limit the political fallout. Dire it may be, but if it is kinder than they have made us fear, we will all heave a collective sigh of relief.

Our public finances have been badly mismanaged, I think. Government funding has relied far too much on the speculative property bubble, which has now burst. The sharp reduction in stamp duty and other property related receipts, the slowing economy, and increasing unemployment have led the Department of Finance to forecast a deficit in 2009 of €13.3 billion, 7 per cent of GDP, unless drastic action is taken. Plans must be changed to reduce the deficit. We must expect the budget to raise taxes, cut services and defer plans for desirable new infrastructure and services. And I do not think these changes will be temporary. The fact is we can never return to the unsustainable property boom which artificially buoyed exchequer receipts. Revenues must be found from elsewhere or necessary services will be cut. The global financial crash can only make the Government’s difficulties worse, but I do not believe their denials that the deficit is home grown.

But now is not the time to assign blame and punish the guilty – there will be time enough for that in years to come. Now is the time for those responsible to take the hard decisions on behalf of us all. Let us pray that they are also the right decisions. I do not envy Brian Lenihan today.

On his way into Government Buildings Brian Lenihan said, ‘The Budget will stabilise the economy and inject confidence into the financial system, while also looking after vulnerable people.’ I like the bit about looking after the vulnerable. Jesus tells us, ‘Just as you did it to one of the least of these my brothers and sisters, you did it to me.’ It is our collective, Christian duty in these difficult times to look after the vulnerable, so I pray that Brian Lenihan will live up to his confident words. Please God, he will look after the vulnerable in our own society, the poor, the disadvantaged, the unemployed. But please God he will not forget the very poorest of the poor in the developing world.

Overseas development aid – an Irish success
For me, perhaps the biggest test of his budget will be how he deals with overseas development aid. It is to the credit of successive Governments and to the Irish people that we have so expanded development aid in recent years. Like all rich countries we have promised to increase development aid to 0.7% of GNP to achieve the UN’s Millennium Goals agreed in 2001, which include eradicating extreme poverty and hunger. Ireland has made a public commitment to achieve this by 2012. And unlike many other countries we have been delivering on our promise. Since 2001 Irish development aid has grown from €250 million to €870 million. We are now the sixth highest per capita donor, giving 0.54% of GNP in 2007. We are on track to achieving the target of 0.7%.

This table published by the OECD, showing how countries compare in aid to the poor world in 2007, makes interesting reading. The five leading countries that already exceed the target are all from northern Europe. Apart from Luxembourg, they are historically Lutheran – could their faith tradition have influenced their generosity? The USA is the largest absolute giver of overseas aid, but at 0.16% of GNP, its per capita performance can only be described as niggardly.

Of course these statistics do not tell the whole story. They are for official development aid, from state sources, and exclude private giving, for which it is difficult to find comparable statistics. Perhaps because of generous tax relief, experts believe that private US citizens give as much again as their government – but that would still leave them way down the league. How does our Irish private giving compare? I don’t know the figures, but I suspect and hope we too are privately generous. Nor do the statistics allow for how effectively the aid is used. Some decry aid as useless – I am thinking of a mean-spirited columnist I choose not to name – but aid does help poor people. And Ireland has developed an international reputation for using its aid well.

So what will the budget bring? Will Brian Lenihan live up to his promise to look after the vulnerable? Will he at least maintain the current percentage level of overseas development aid? We will soon know.

The morning after
It is now the morning after the budget. Like everyone else I’m sure, I am struggling to get to grips with its implications. It is indeed harsh. The pain will be felt by all of us through a combination of tax and duty increases and service cuts. Government supporters would like us to accept this as a patriotic duty, but there is a lot of anger around, as I detected chatting to people while doing the messages.

What about the promise to look after the vulnerable? I looked at the website of CORI – the Council of Religious of Ireland - to see their analysis. They say, ‘Our overall conclusion is that Budget 2009 failed to protect the vulnerable in the manner or on the scale required.’ They welcomed the increases for social welfare recipients – the only group to gain in the budget - while criticising the failure to fully cover the rising costs of food and fuel for poor people. They also criticised asking the working poor to pay the 1% income levy and the failure to increase child benefit. These are perhaps reasonable criticisms. But I think we should acknowledge that quite a lot was done in the budget to protect the vulnerable in our own society, even if we would have liked more. Perhaps the budget deserves half a cheer for this.

What about my own key test, protecting Ireland’s overseas development budget? This has been cut by €7million to €891 million for next year, but because GNP is expected to fall, this actually represents an increase to 0.56% of projected GNP. We remain on track to meet the 0.7% target. We continue to live up to our promises to the poorest of the poor, despite the economic difficulties. It really is remarkably good news, worth a full cheer at least!

If you agree with me, why don’t you write to a government TD to tell them so? When they do something right, they should be congratulated, to encourage them to do more of it in future!