Varadkar on the front loading budget cuts

This solo contribution by Dr Leo Varadkar is the best solo effort I have read recently. It is a serious piece of work deserving serious consideration. It was published by the Sunday Business Post on 10 October 2010.

Get the budget pain over quickly
10 October 2010 By Leo Varadkar

Ten months ago today, Minister for Finance Brian Lenihan delivered his budget speech in the Dáil, declaring confidently that ‘‘our plan is working’’ and that ‘‘we have turned the corner’’.

As usual, he was eloquent, passionate, sincere and persuasive.

As usual, he was wrong.

Since then, the economy has continued to recede.

Unemployment has risen, and the cost of bailing out the banks has spiralled beyond our worst fears.

On budget day last year, the government said it would need a €3 billion adjustment for next year, with another €2 billion required in 2012, €1.5billion in 2013 and €1 billion in 2014 – a total adjustment of €7.5billion.

We now know that this will not be enough, due to the bank bailout, higher interest rates on our debt, and weaker than anticipated growth.

To honour Ireland’s commitment to reduce borrowing to the sustainable level of 3 per cent of our GDP – or €6 billion per annum – by 2014, the IMF estimates that a total adjustment of €10.7billion will be required, roughly €1 billion more each year than the government had planned.

Now the government is preparing a four-year plan to show how this will be done, and how the specific spending cuts and new taxes will be implemented along the way.

This is a good idea. If it’s credible, it will improve market confidence, and citizens will at least know what to expect in forthcoming budgets.

But the fact that it has left it until now to prepare a four-year deficit reduction plan speaks volumes.

It’s an admission that the government has been just drifting along for the last two years without a real plan. And how could a government with no plan ever have the confidence of the markets – or of the public?

It looks like the government intends to spread the adjustment relatively evenly over the four-year period, with a budget package of spending cuts and tax increases of about €2.5 to €3.5billion each year.

This would be a mistake.

Every year for the next four years, citizens and business people will live in dread of the next budget, and the tax increases and cuts that will be imposed upon them.

It will be death by a thousand cuts, and torture with a thousand tax increases.

Savings will increase, spending will fall and investment will be put off.

That strategy risks turning a bad recession into a lost decade of economic stagnation.

Worse still is the proposal by some left-wing groups to drag it all out over an even longer period.

While they don’t say it explicitly, this would mean even deeper cuts in total, as delaying the pain means more borrowing along the way and higher national debt repayments.

The fact that this view is not held by the Labour Party is encouraging.

There is no easy way out of the fiscal hole.

But perhaps we should start thinking about a different approach and, specifically, about frontloading the adjustment.

We could even get most of it out of the way in year one. A€5 billion or €6 billion adjustment, for example, would reduce the deficit to 8 per cent of GDP.

That would bring our deficit below that of the US, Britain, Greece and Spain, and into the same league as Japan, Portugal and France.

Our deficit wouldn’t even be far off the eurozone average of 6.5 per cent of GDP.

The markets would soon stop worrying about Ireland, and would turn their gaze elsewhere.

We would be able to say that next year’s austerity package (albeit severe) would be the last.

Crucially, there would be no more hairshirt budgets down the line.

People would feel confident enough to spend again, invest in their business or even move house.

Some will argue that this could not be done; that it would be impossible to find savings on this scale.

I disagree.

Colm McCarthy’s Bord Snip Nua report, which has gone largely unimplemented, contains proposals for savings of €5.3 billion in a full year.

Adopting two-thirds of the recommendations would yield savings of €3.5 billion.

A generous voluntary redundancy package of six weeks’ pay per year of service could reduce the number of people working in the public service to 2005 levels, yielding savings of €450million (excluding the capital cost of the redundancy payments).

The government already plans to take €1 billion from the capital budget.

Adopting two-thirds of the savings in the Local Government Efficiency Review would give us another €300 million.

That would leave about €1 billion to €1.75 billion to be found in revenue-raising measures, depending on the scale of adjustment needed.

Implementing the Commission on Taxation’s recommendations on the elimination of tax shelters (with the exception of taxing child benefit) would yield €552 million.

Water charges could bring in about €150 million – with a graduate charge bringing in something similar in the first year.

Capping tax relief on pension contributions would yield another €330 million, and consolidating PRSI and the income levies into a single levy charged at a low rate on all income could deliver another €200 million.

Added to that is a €250million sum expected from next year’s spectrum auction.

There would be no need to increase income tax, Vat and excise.

Neither would further cuts in basic pay or welfare payments be needed.

Necessary reforms, like bringing more people into the income tax net, and some form of local government or property tax could be deferred until 2012 or 2013,when people would be more able bear it.

Of course, the main argument against frontloading is that adjustment on this scale would deflate the economy, reducing domestic demand and leading to further job losses.

This is a reasonable concern, but it can be avoided through a stimulus plan.

This could be done without affecting the government’s balance sheet by using money from the National Pension Reserve Fund (NPRF) and the sale of nonstrategic state assets.

This is the philosophy behind Fine Gael’s New Era plan.

In stead of investing €11 billion of our €21 billion pension fund in buildings in Tokyo or the New York Stock Exchange, we should bring the money home and invest it on a commercial basis in Ireland, on infrastructural projects that will generate a return for our pension fund.

This could include building a next generation network with fibre connections to 90 per cent of Irish homes and businesses, forestry, new toll roads, water services and even school buildings built and owned by the pension fund, but rented to the Department of Education.

Proceeds from the sale of non-strategic state assets could be used to invest in renewable energy projects, without the need for price subsidies and a labour-intensive programme to insulate all of our public buildings.

This sort of stimulus spread over two or three years would counteract any deflationary effect that might come from a sharp fiscal correction.

Instead of four years of austerity and stagnation, as proposed by the government, we could deal with most of our budgetary problems in the next four months.

Rather than submitting ourselves to death by a thousand cuts, we could accept that we need radical surgery.

Instead of waiting until 2015 or 2016 for living standards to improve, the future could be looking bright by summer.

It’s at least worth thinking about.

Dr Leo Varadkar is Fine Gael spokesman on communications and a TD for Dublin West