Author: Karl Whelan

The idea that social welfare recipients should take cuts is normally considered politically unacceptable. I have mixed feelings about the measures taken today.

On the one hand, when one looks at measures not taken (whatever legal reasons there may be) such as the failure to cut pensions for retired public sector workers (traditionally linked to pay levels which have now been cut) and the failure to freeze public sector increments, as well as measures taken such as the VAT and excise cuts (costing €257 million on a full year basis) and the range of dubious so-called stimulus measures (vouchers for cheap rail travel for senior citizens visiting Ireland from abroad?) one could conclude that these cuts were avoidable.

On the other hand, against a background of significant deflation and with wage rates falling and the potential for serious poverty traps (where people are better off unemployed than in low-paid jobs), one can argue that cuts in unemployment benefits may unfortunately be a necessary part of any policy mix aimed at limiting unemployment over the next few years. (This particular argument does not apply, however, to disability or carer’s allowances). Moreover, with social welfare spending taking up such a large share of total expenditure, it was not realistic to draw a line in the sand and declare it to be off limits.

As an economist, I can manage to hold both sets of opinions at once.

The budget contains some measures that have been advertised as stimulus. The opposition parties will certainly argue that these measures didn’t go far enough.

I’ll take a contrary attitude here. All the parties put forward plans in which the net fiscal adjustment was about €4 billion so the fact is that all parties are agreed that the overall macroeconomic effect of the budget needed to be contractionary. It’s easy to paint a budget that has €5 billion in spending cuts and €1 billion in new spending initative as “having stimulus” and a budget with €4 billion in spending cuts and no new initatives as being “devoid of stimulus”.

The reality is that, by and large, these two hypothetical budgets will have the same effect. Of course, one can always argue that some types of tax cuts or spending increases are particularly stimulatory and that one can think of a better mix than the government put forward. But, by and large, this is a secondary issue to the principal one related to the overall macroeconomic stance.

My contrary attitude extends to the government’s own limited stimulus measures. The idea that the the half percentage point increase in the VAT rate triggered an huge increases in cross-border shopping was always ridiculous: See two articles from the early days of this blog by current adviser to the Minister for Finance and former blog alum Alan Ahearne (back then blog posts were written in the third person apparently!) and a later crankier post by me.

To my mind, cutting the VAT rate is just a kneejerk response to a wildly inaccurate public perception based on a desire to be seen to be doing something “positive”. Cutting excise duties on alcohol similarly won’t do much to reduce cross-border shopping. I wouldn’t care much if these were measures that didn’t give up much revenue. However, the summary of budget measures shows that these two decisions alone will cost €257 million on a full-year basis. For comparison, the cuts in child benefit will save €220 million.

And, of course, I never liked the scrappage idea. And I still don’t.

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.

The budget materials are now available here.