As Minister for Finance Brian Lenihan prepared to get to his feet yesterday afternoon tension in the lower house of the Oireachtas was at fever pitch as opposition TD’s protested at the fairness of the media being afforded the luxury of seeing the budget statement before they themselves. The question of fairness was raised and this issue of fairness will no doubt dog this, the Minister’s second budget, for some time to come. One thing is for sure Minister Lenihan’s budget can probably be best described using a version of President Obama’s now famous catchphrase – Can he tax it? Yes he can!
As predicted the budget was tough, described as “the budget from hell” by Labour TD Joan Burton as the government sought the plug the gaping hole in the public finances with both increases in taxation and decreases in expenditure. Two problems emerge here. Firstly, international evidence suggests that it is not wise to attempt to tax ones way out of a recession. Secondly, most of the expenditure cuts came on the capital side with less attention focused on current expenditure.
The Government claims that the tax increases are progressive – with those earning the most, contributing the most. However, nobody was spared. Lower, middle and higher income earners were all accordingly hit with increases in the income level. The ceiling for PRSI was increased, unemployed people under twenty saw their social welfare reduced to just €100 a week. Parents have seen childcare supplement halved next year and will see it disappear in 2011. As predicted very little tax was placed on the “usual suspects” – alcohol, cigarettes and petrol, with only smokers hit by a €0.25 increase in the price of cigarettes. Both capital gains tax and capital acquisition tax increased. Overall the government raised an addition €1.8 billion but is this enough to save our ailing economy.
The answer remains to be seen. The Ministers opened his speech with a 6 point plan for recovery; stabilising the public finances, restoring the banking system, regaining competitiveness, protecting jobs, stimulating consumer confidence and reinstating our international reputation. Some of the measures introduced such as the new asset management agency to take bad loans off the banks' balance sheets could help and will allow banks, which are an essential element of any economy, to recover faster. The establishment of the Enterprise Stabilisation Fund, worth €100m over the next two years, is aimed at providing direct financial support to eligible internationally trading enterprises and hopes to stimulate Irish exports – one of the sources of our now forgotten booming economy. The government mentioned the introduction of new retraining and education programmes and ironically the reduction of under 20s social welfare could be positive in the long run as there is a direct incentive to a greater return to education.
However, the outlook is still looking rather bleak. The severity of the tax increases introduction today has confirmed one thing for me today – we blew the boom. The medicine that we have all collectively taken has been bitter, the fear is that it may be so severe as to kill the patient. Let’s hope not.
