Ok, so as with some previous big events such as the Snip Report, it may be best to partition the discussion of the budget into a set of separate threads. I’ll put up a few topics, offering a few of my opinions as I go along.
Let’s start with a big question. Irrespective of one’s opinion of how the adjustments have been achieved, has this set of budgetary measures stopped the rot in the public finances? Will it succeed in stabilising the public finances? My guess is that it will and that, if passed by the Dail (I’m assuming it will) this set of measures will prove to be a key step on the road to fiscal stability. In particular, I would guess that participants in international financial markets will be impressed by the package and that this will help a lot in distinguishing Ireland from Greece, which could prove to be an important issue in the coming months.
The other attitude to this package is what, I suppose, one could term the ICTU approach. This would emphasise that the cuts are likely to further depress the economy and keep us in a downward recessionary spiral. On this point, it’s worth noting that the budget figures concede that the €4 billion in cuts will have a negative effect on tax revenue: Table 8 of the Stability Program Update concedes that the budget day expenditure adjustments of €3.8 billion will reduce tax revenues by €897 million, so the net reduction in the deficit relative to the baseline laid out in the White Paper on Saturday is around €3 billion.
20 replies on “Budget 2010: Stabilising the Public Finances?”
I wouldn’t use the word ‘stabilise’ as it gives the impression that the heavy lifting is complete. Without further correction Ireland will default. The initial steps in today’s budget were needed. Perhaps something on the tax side would have made things more palatable to the public sector.
The budget will at least stabilise the public finances, but it was in introducing a carbon tax and pointing to future water charges & a property tax that Lenihan has shown where we can expect to go from here.
Budget 2010 is only the first layer of foundation for Irelands future tax strategy.
Several new concepts have been introduced which can be progressively expanded in future budgets.
Tax exiles getting hit for 200K will not bring in a lot of money as I believe there are only about 400 high net worth individuals anyway, which equates for about 80m. Not an insignificant sum but ineffectual when compared to borrowing close to 500m per week.
Other changes like pensions for future civil servants will make a big difference in the long run.
The main point is a lot of new forms of taxation have been introduced. The thin edge of the wedge as they say. These can always be expanded and expanded and expanded in future budgets.
I will be interested to learn about the taxs planned for 2011, Mr Lenihan mentioned rolling the PRSI, Income levies into a new low tax rate which everybody will have to pay. These will be ringfenced for provision of social services. Of course there is no guarantee that this money will be spent prudently and wisely. I fear that it will only reinforce the squandering which we have witnessed over the last 10 years.
What new plans are in store for the Revenue Commissioners to clamp down on the shadow economy? Access to bank account data for 20 years maybe? I think they were looking at this recently? To be honest I believe the powers that the Revenue have been given are too great. I believe there is a potential for massive abuse in the future.
There can be no doubt the DOF will be determined never again to get caught out as badly as they have been in 08 / 09. This is a defining budget in the history of the state. Ireland will recover from this downturn, but the tax landscape has been changed forever.
The Minister has dropped a large hint on Prime Time that nationalising the banks post NAMA is back on the agenda. DOes this mean that the plan to pay LTEV of 54billion is now dead and an even bigger haircut is to be applied endering the banks insolvent. How much would a recap cost and what would it imply for the budget math? I am guessing tht 7-10billion would be required to raise capital levels to an apporpriate level. Clearly this would imply well above 50% ownership.
Has Lenny been a secret admirer of the 46 all along? Was AA a double agent?
For myself I have no problem with leaving something for the shareholders but the context is that the companies they invested in are chronically insolvent. But leaving the subordinates with everything will then look very unfair (and it’s wrong). The status of the seniors is as unquestioned as that of the church used to be, even though the companies they invested in are utterly bust. This will all probably go round in circles for months, even assuming Lenihan is telling the truth, and usually….
Actually, this is almost certainly ministerial spin. The discount has been higher than the banks wishful estimate so Lenihan will end up in control of AIB. Probably nothing more than that.
I am not sure if the big question was whether it would succeed in stabilising the public finances. From the Ex-PDs to Lab everyone was agreed that the deficit had to be reduced by €4BN.
What FG/Lab suggested was that he should not just stabilise the public finances, he should also lay the basis for recovery.
So the big questions were:
A) Whether Lenihan might simply cut/tax by more.
B) Whether he would use these additional funds to reduce the deficit or as part of an innovative policy.
The answer to both of these was no. Lenihan has laid no basis for a recovery. In these circumstances Lenihan deserves no credit whatsoever.
He did the bare minimum that his job requires. We should expect finance ministers not to bankrupt the country – even under FF’s elastic standards of ministerial responsibility.
Lenihan has been at the cabinet table since 2005. He would not have been made Min for Justice in 2007 if he had opposed the Ahern government’s spending plans or gave any sign of doing so. Since May 08 he has failed to implement any spending cuts until now – 1 year 7 months later. He now admits himself that the inexplicable and utterly reckless bank guarantee almost brought down the country. Then there’s NAMA…
The fact that we are still uncertain if this will be enough for the international financial markets is because Lenihan – McWilliams only told him to safeguard deposits and Cowen is simply too conservative – recklessly deceived us into guaranteeing €400 Bn.
the mere notion of cutting actual nominal rates of expenditure is usually toxic for a government even at a time of crisis, but to actually go ahead and do it in a substantial way is pretty much unheard of from a modern developed economy. And to enact it with a broad consensus at least on the scale of the adjustment required (even if the scope of it was debated) is also amazing. There will definitely be a “positive” reaction from the markets on it, and this will surely help with the efforts to stabilise the finances in the medium term. It may also encourage other European nations to learn some lessons from it as well.
There was also an hugely important line in the sand drawn around income taxes, in that it will be very difficult for another party to come in and raise them above their current levels given the difficult stand taken by Lenny to leave them as is. Its an important long term pro-growth pro-worker decision which will also stand to the country’s long term recovery propsects.
Taxes will rise as there is no alternative, but delay of course merely means more debt servicing paid abroad!
Ahhhh the sacred cows!
I watched Prime Time too and also wondered if that was a big hint about nationalising the banks next year………… but then I thought about it and thought about the man and thought “nah, he’s just trying to make out that he’s leaving all options on the table to make it look as though he hasn’t got a single-minded agenda.” We will soon find out if the market believes him or not when it opens this morning and we see how AIB and BoI shares do.
To go back to the estimates and treat this like a business
2009 €12b loss on the current account
Estimates 2010 €16b loss on the current account
Budget 2010 cuts of c€3b on the current account (the rest is capital) less c€1b in lost revenue as a result of the cuts. Saving on current account €2b.
Ireland PLC will lose €14b in 2010 in P&L terms versus €12b in 2009, not terribly encouraging but “we’ve turned the corner”. So the expectation for 2011 presumably is income increases as growth returns and expenditure decreases as social welfare drops with less unemployed. It’s still a very big gap to bridge without some more radical changes on both income and expenditure.
Is there a 5 year plan available on how we’re going to get to a balanced budget on the current account?
There’s something I don’t understand in the projections for 2010.
GDP projected at 164 bn
GGD at 73% so about 120 bn
That’s 14 bn up from the end 2009 projected figure – (GGD of 64% on GDP of 166 bn) (numbers may not add up due to rounding and idiocy).
But the budget is projected to be 55 bn, with income projected at 31 bn (?). So that implies a borrowing requirement of 24 bn, not of 14 bn.
Where have I gone wildly wrong?
It’s an otherwise excellent document, though. Interesting to see full income and expenditure figures, even if there are some oddities (what was the 7odd bn in ‘OTHER’ spending in 2009?).
“(what was the 7odd bn in ‘OTHER’ spending in 2009?)”
Wild guess. Anglo & NPRF.
One other thing that I guess fits in this thread better than elsewhere. Expected interest costs of 4.6 bn for next year.
2008 interest cost 1.5 bn on 50 bn GGD at year end.
That’s about 1.94% on average vs an average ECB refi of 3.85%
2010 budgeted 4.6 bn in interest on expected GGD of 120 bn (73% of 164 bn)
That’s about 3.83% on average vs an average ECB refi of 1.23%
(Note – simple averages only – what was the rate in the month, sum it up and divide by 12 – for illustration only…).
Someone has been coining it on Irish treasuries…
Nope. My turn to point out that it’s in the capital budget!
Table is on p.21
There’s also an ‘OTHER’ on the revenue side.
Figures are for 2008
Other revenue 5,327 million (item 15)
Other expenditure 7,730 million (item 23)
Apologies, a I’ve just noticed it was in 2008 spending, but it will be there in 2009 and onwards, with expenditures greater than income.
I notice there is close to €6bn in non voted expenditure for 2010.
Further bank bailouts?
I notice that the 2010 Estimates of Receipts and Expenditure have nothing for Anglo or the NPRF in 2010.
http://www.finance.gov.ie/viewdoc.asp?DocID=6109 … Note 6 Page 9
So the non-voted Capital Expenditure provided under reporting requirements of the Stability and Growth pact differ from the DoF 2010 Estimates of Receipts and Expenditure by an amount of €6bn.
Have I got that right?
That’s Table 1f: SUMMARY OF CAPITAL EXPENDITURE 2010 in the Ireland – Stability Programme Update.
Looks odd that they should differ.
Non-voted would be stuff like the interest bill and the EU contribution. I think that comes to about 6 bn.
Yep, the standard practice, so I’ve been led to believe, is that if it hasn’t happened yet and it is not a budgeted cost, you don’t have to put it into the estimates. I mean, who could possibly guess what strokes will be pulled?
Not sure you’re comparing apples with pears there – the voted capital expenditure is the NDP stuff (table 1f in the stability report). The non-voted capital is all the sh1t that happens through the year that they want off balance sheet so they call it ‘investment’.