Budget 2011

In an earlier post, I wrote about postponement of water charges and property taxes — partly because proper preparations started too late and have not progressed fast enough. The same is true for privatisation and, it emerged today, for child benefits. It looks increasingly likely that there will be €3 bln worth of spending cuts in the 2011 budget.

37 replies on “Budget 2011”

At this stage it will be quicker if they just annouce what they can do rather than what they can’t do.

Why in heavens name make things more complicated. Child benefit should only go to those on social welfare. The current stupid notion is in that self same realm with the Covenants for third level.

@ Michael Hennigan. If the woman has a brutish husband the 1800pa will not matter all that much. Nor are we in the 1940 anymore where such a woman has to remain within such a situation.
But handing the equivalent of E18000 tax free for two kids is a bit rich in my book.

The policy prescription seems to be to frontload the spending cuts, and backload the increases in taxation. If his intention is to follow that prescription, then it might perhaps be a little unwise for the Minister for Finance to have tax raising options ready for his cabinet colleagues come budget time.

What is depressing is to see politicians (and others) who say they accept the need for deficit reduction, including a €3bn reduction for 2011, and then proceed to reject every single specific item which might contribute in a significant way towards that reduction.

An appalling mixture of stupidity and cowardice.

@John
In fairness, tough decisions were made in the last couple of budgets.

Besides a degree of fatigue, there is also capacity problem: Child benefits cannot be reformed in a fair manner with the current databases. Water cannot be charged without meters. Property cannot be taxed without a method to assess its value. State companies cannot be sold without preparation. These things take time and effort.

Methinks the Government senses it is running out of road. It can’t postpone holding the 3 by-elections indefinitely. Why frighten the already nervous horses more than you need to when an autumn rendezvous with the voters is looking increasingly likely – and a new government will have to make the hard choices?

@Richard,
All the more reason to backload further increases and frontload further cuts if the Minister has accepted that prescription.

To the extent that child benefit actually goes to the child, this seems to be more a function of it being specifically labelled as being a “child benefit” as opposed to which parent it is paid to. I did a paper on this about ten years ago using Irish Household Budget Survey Data http://www.ucd.ie/economics/research/papers/1999/WP99.26.pdf . There was also a paper by Peter Kooreman looking at Dutch data in the American Economic Review around about the same time which came to pretty much the same conclusion.

The problem here seems to be that while universal benefits have some attractions they are expensive and we are no longer in a position where we can afford to avail of expensive options (to anticipate some comments to this, yes, I know the bank bailout strategy has been incredibly expensive and the amounts involved dwarf the sums here, but let’s try just to analyses this issue on its own merits for the moment). Either means-testing or taxing child benefit may create administrative problems of their own, but in the context of required budgetary savings the sums involved are significant. Almost certainly any other option which would bring in the same amount of money would also be painful to implement. Means-testing or taxing child benefit would remove a dead-weight loss (it goes to many families who don’t need it) and if desired could even be structured in a way that provided greater support to very poor families (while still saving money).

Mothers, I suspect, have a very different take on this than fathers. Mortgage defaults are rising. Renegotiated contracts must be increasing by the week between customers and their banks as the unemployed come off PRSI related payments.The more income hoovered out of the average family’s pot, the nearer to default they move. Didn’t the IMF point out a few weeks back that something has to be done to shore up domestic mortgages? Unless someone joins the dots between what an family can afford to pay and their indebtedness, it seems to me we are going round in circles talking about cutting here, freezing there, stimulating something over there, etc. The mistake all along has been to see the banking crisis from just one angle, the big boys corner. If the latest OECD projections for weak EU recovery drawn into 2015 play out, with Ireland lagging, the default position cannot improve.

Might I suggest that posters take An Taoiseach’s advice (just heard on 1 o’clock news) and stop trying to produce a budget while we are still only halfway through the year. At this stage, we don’t know how tax revenues will turn out for year 2010. The projected 3 billion fiscal adjustment is not set in concrete, but is based on the assumption that tax revenues will fall by 6pc this year, the forecast made at budget time. If they fall by more, then a larger fiscal adjustment will be needed. If they fall by less, then a smaller fiscal adjustment will be needed.

Tax revenues are affected by 2 factors: economic growth (in volume or constant price terms) and price inflation/deflation. It is now clear that the economy is growing (in volume or constant price terms) much faster than was predicted at the time of the 2009 budgets. In the April 2009 budget, the DofF forecast that GDP (in volume or constant price terms) would fall by 3pc in 2010. By the December 2009 budget, the DofF had revised this forecast to a fall of 1.5pc. But, last week they revised it further to one of a rise in GDP of 1pc in 2010. This augurs well for tax revenues coming in ahead of target. But, as hoganmahew would no doubt point out (correctly), as far as tax revenues are concerned, this has been nullified by higher than expected price deflation, resulting from the rise in the value of the euro against the dollar and sterling in 2009. However, this has been reversed and the euro has fallen quite a lot from its early 2010 peaks. If it stays at these lower levels, price deflation will soon give way to price inflation. The combination of higher than expected GDP growth (in volume or constant price terms) AND price deflation giving way to price inflation (if the euro remains at its present lower levels) means that there is a distinct possibility that tax revenues in 2010 will come in higher, possibly quite a lot higher, than predicted at budget time. I am not stating that this will definitely happen. There are so many variables and unknowns that it is impossible to predict. But, there is a distinct possibility that it will happen, which means that its silly to be trying to write the budget now, just halfway through the year.

All the above is conjecture. If we want to see what has actually been happening to tax revenues, I have calculated the cumulative y-o-y fall in tax revenues so far in 2010.

Jan 2010: cumulative tax revenues to date down 17.7pc compared with 2009
Feb 2010: cumulative tax revenues to date down 17.8pc compared with 2009
Mar 2010: cumulative tax revenues to date down 15.0pc compared with 2009
Apr 2010: cumulative tax revenues to date down 10.8pc compared with 2009
May 2010: cumulative tax revenues to date down 10.4pc compared with 2009
Jun 2010: cumulative tax revenues to date down 8.7pc compared with 2009

These are the cumulative figures for the year to date in each month, not the figures for the individual months. The December 2009 budget target for 2010 was a fall in tax revenues of 6pc in 2010. As the figures show, the cumulative fall in 2010 has come down very rapidly in recent months, probably due to the factors I mentioned above. If it continues to come down at this rate, it should be well below the 6pc budget target by the end of 2010.

@JohntheO
I would prefer to keep options open at this stage. If the numbers are more favourable come November, a property tax could have financed the abolition of income levies, and the sale of RTE could have financed a good few primary schools. Those options are disappearing, so the choice is between larger and smaller cuts.

@Richard Tol

Well, what is wrong with cuts?

The Haughey/McSharry government introduced swingeing cuts between 1987 and 1989, and twenty years of the fastest economic growth ever recorded in western Europe followed. Look at the cuts the new UK government is now about to introduce. They are on a massive scale.

The point about choosing cuts over tax increases is that higher economic growth usually results, and the cuts can then be reversed. My humble prediction (based on what I wrote above) is that the deficit in 2010 will turn out to be somewhat less than was forecast at budget time. If this proves accurate, the cuts needed will be on a modest scale. Far from increasing taxes, if the deficit comes in lower than expected, we should get rid of some taxes, like the one on air travel than Michael O’Leary is always going on about.

@JohnTheOptimist
How does the revenue figures being behind profile reconcile with the growth forecasts being ahead of expectations?

@JtO
Understand some of what you are saying but you are talking as if this is the last year of budget cuts that need to be made. If we are a modicum ahead of schedule this year it still makes sense to stick at least with the plan of 3bn. Despite some parties suggesting that we should take stock after this budget I doubt that the EC/IMF will favour this idea.

@Richard
Water cannot be charged without meters.

It can. In England and Wales with a privately owned water supply and wastewater system only one-third of residential properties are metered for water supply. (http://www.water.org.uk/home/news/comment/utility-week—metering) Non-metered residential properties are billed on the basis of rateable valuation. The fact that in England and Wales successive governments have refused to make retroactively installing water meters mandatory either for residential consumers or for water companies should tell us that water meters are no easier politically than flat charges. That English and Welsh residential customers can volunteer to have a meter installed by their water company at no cost but clearly haven’t flocked to do so should also be noted.

A flat charge is of course not the best way of charging for water but it’s better than Ireland’s current system and some kind of flat rate charge is common in many developed countries, in particular English-speaking ones. If a fixed charge (based on property value or connection size say or some combination of factors) was introduced along with a compulsory public rate setting exercise for each local authority and ring fencing of water/wastewater revenue and expenditure in each local authority it would be useful in advance of installing residential meters. The principle of paying explicitly for water/wastewater needs to be implemented sooner rather than later and a published detailing of each local authority’s spending would be revealing. It is very likely that the cost of installing meters in Ireland’s current fiscal crisis will end up postponing any action for many years. If people aren’t actually dying from unsafe water, water supply is such a controversial topic that most politicians will stay well away from making changes no matter how necessary they are.

@David Madden -“yes, I know the bank bailout strategy has been incredibly expensive and the amounts involved dwarf the sums here, but let’s try just to analyses this issue on its own merits for the moment”

Don ‘t see why it should be considered on its own – all these things are connected. There would be no need for some of the cuts to the most vulnerable in our society if the stuff on ‘the other hand’ wasn’t there. Let’s discuss not giving the banks any more money instead.

Speaking of vulnerable people (i.e. those easiest to hit and get away with it) I see that IBEC are weighing in too:

http://www.irishtimes.com/newspaper/breaking/2010/0720/breaking33.html

Joseph: what I meant was that items such as whether child benefits should be universal or targetted, the introduction of water charges/property taxes etc are issues that are worthy of discussion anyway. Sure, the money going to the banks makes the public finance problem all the worse, but there are legitimate equity and efficiency reasons to consider the other issues as well.

Means testing is an unnecessarily bureaucratic and timeconsuming way to deliver state support – means testing child benefit would also require many additional appointments for assessment for people who have no other welfare needs, incurring extra staff costs.

Pay it first and tax it as part of the normal return of income, with a social welfare “P60” given to each recipient, making a annual return a prerequisite for future payments beyond the annual cutoff date. Between tax credits and exemption limits few truly needy families should see a change in their circumstances.

Mark, I agree. Paying it to all and then taxing it seems preferable to means testing.

The problem with taxing it is that the work-at-home wife of a multi-millionaire will not pay any tax on it while a working woman who makes 30K will pay tax. This issue was raised before when taxing child benefit was discussed last time round. The problem is that child benefit is paid to the mother so the individualisation of the tax system creates some inequity. All in all, I still think that taxing it is the best option.

The government have trumpeted the fact that they are taking the tough decisions. But:
1. They had to.
2. With only 2 years left till the next election their appetite for retrenchment let alone for new taxes/cuts will decline rapidly.
The easier options of raising income taxes and of slashing capital expenditure were always their most likely choices anyway. Now they’re certain.

I don’t know why some economists who love to predict the next Budget keep persisting on writing off the prospects of introducing water charges. Remember, the work has to be done on the ground not in academic offices:
I was driving out of my house, which is located on a little cul de sac in South Kerry, on Monday and saw council workers digging up a bit of the road outside everybody’s home. I put down the car window and asked, among other things, what they we doing. They secretly informed me that they were putting down WATER METRES!!
Now that the Dail is on Summer holidays now would be an ideal time to put down water metres. Given that Kerry County Council aren’t the most efficient in the world, it surely makes sense that they start now. So I suppose you will wait a few more weeks until Dublin city or dlr councils follow their Kerry colleagues until you will start to write on the introduction of WATER CHARGES, their implication, and the revenue it will generate from 1 January 2011?

@Garo
“The problem is that child benefit is paid to the mother so the individualisation of the tax system creates some inequity.”

Shouldn’t it be called ‘mother benefit’ therefore?

So now we are looking at the all cut – no tax scenaro Karl advocated against a few weeks back.

@Rob S – “So now we are looking at the all cut – no tax scenaro Karl advocated against a few weeks back.”

Could have sworn that is what I heard Brian Cowen say yesterday. Cuts not tax hikes.

Is anybody on this forum on minimum wage? I’m not, but I worked it out – I couldn’t live on it, even with a very modest lifestyle. But as usual, cuts start with those on the lowest levels. (Why do tax cuts usually trickle down while pay cuts trickle up?).

If we had the concept of a maximum wage as well as a minimum wage, would it not make more sense to cut the upper wages instead? I’m thinking particularly about public sector jobs. There isn’t a person alive that can’t live a comfortable life on €100k, yet we have people employed in the Irish public sector taking home well over double that; never mind the top private sector earners whose salaries go into seven figures.

Why are we always looking to cut money where it’s needed (minimum wage earners, health care, education) rather than taking a few grand per year from the big earners? Any extra money the goes into the pockets of our less well off country-folk gets spent – i.e. goes straight back into the economy – whereas extra money to the rich will end up sitting in a savings account and nobody really benefits.

Dear Sir,What about those like myelf who bought some costly houses due to bank charity as I will call it and can not pay.Should we not be thinking to give some relief to people like they have done in UK Recently who have so much liability.This government is by the people but is not for the people.Will some one some one understand what I tried to say.

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