Lock up the children – its baby-eating time. The recent budgetary numbers were bad enough. But figures I have received from an informed source within a Government department suggests that the picture painted by the Exchequer Statement for October could be overly-optimistic. The year-end tax and spend figures could be seriously out of alignment with all the consequences that will hold for the 2008 budget. When P.J. O’Mara, in the context of massive cutbacks in public services in the late 1980s, said it was ‘baby-eating’ time, it was no joke. And the Left, bereft of an independent analysis (independent from the predominant conservative consensus) is currently incapable of offering a progressive critique.
Let’s summarise: tax revenue for the year ending September 30th was approximately €400 million below projections. On this basis, the Minister for Finance accepted that the shortfall would be of the order of €500 million at the end of the year, resulting in an Exchequer deficit of approximately €1 billion for 2007. But there’s an ‘if’ to all this.
The ‘if’ is based on maintaining expenditure at projected levels. Already, expenditure is 18% higher than projected. This has led Pat McCardle, Ulster Bank’s chief economist to predict a year-end Exchequer deficit of €1.5 billion – nearly 3 times the amount projected by the Minister in his Budget speech last year.
It is not difficult to discover where the problem lies – property-related taxes. For years, the Department of Finance had been underestimating the revenue from these taxes. Now they have over-estimated. It would be easy to blame Department officials but very few saw either the steep rise in property-related activity or the extent of the recent drop-off.
The two main property-related taxes – capital gains and stamp duties – are declining; in the case of stamp duties, declining rapidly. At the end of January, stamp duties were up over 10% on projections. By the end of September, stamp duties were over 13% below projections. Capital Gains turned negative much earlier.
The Minister took some comfort in the figures. After all, didn’t combined income and corporation tax receipts show an increase? Doesn’t this mean that the downturn is isolated to construction/property related activities? Well, we can play this game all night.
The fact is that if weren’t for corporation tax receipts (multi-national tax receipts, by and large), we’d really be up the creek. All other categories are heading south while income tax is treading water. And lest we comfort ourselves that this is just a property-tax phenomenon – excise taxes are down by nearly 5%. This suggests that the decline in VAT is more widespread than just construction.
And this decline could accelerate. Figures provided to me by an informed source in a Government Department suggest this deterioration could spiral out of control. Of course, within various Government departments different sets of numbers are crunched based on a number of scenarios, some optimistic, others not so. These are not the final word, just conditional. The figures I was provided appear on the pessimistic side (or so we might hope). But the fact that they are given credence suggests a wider pessimism within various Government departments, despite what Ministers might say. So what do these projections state?
The shortfall in Government revenue could be as much as €2 billion by the end of year – or nearly four times the amount suggested by the Minister. This would leave an Exchequer deficit of upwards of €3 billion. That is a serious situation.
The leaked figures suggest that every category – save for corporation tax – will be in decline. Could this happen? On the basis of the last five-month trend, we certainly should be expecting a year-end revenue shortfall of nearly €1.5 billion – again, three times the amount the Minister is conceding. It could veer very close to the leaked figures if the returns from the self-employed due in a few weeks are disappointing.
In one sense it’s irrelevant whether the crunch comes at the end of the year or a few months later. Falling GNP growth, private consumption, employment growth, housing completions: we could well be facing into a situation that by next year tax revenue is flat-lining in real terms.
If the figures available to me are even half-right, you can kiss off income tax cuts (which would be no bad thing). More depressingly, public expenditure will be targeted. Clearly, the increases over the last few years will be a thing of the past (except those categories ring-fenced by Fianna Fail under their vaunted NDP programme). HSE cuts? Recruitment bans? Ward closures? Deferred investment? Be prepared for more, much more. Ireland already has a low-spend economy. After next year it will go lower. When the cuts come, they will take pieces of bone.
What has been the Opposition response (besides the ‘you-really-made-a-mess-of-this, Minister’ taunt)? According to Fine Gael’s Richard Bruton, TD:
‘Fianna Fáil Government's spending is continuing to grow at a pace far in excess to growth in the economy. These spending trends are not sustainable in an environment of slowing growth in tax receipts and in the economy in general. Current spending is growing three times faster than the rate of tax growth.’
What would you expect from a party that put the ‘aw’ in austerity? Cut, cut, cut. Spending out of control. Doom and doomer. Enough said. So, what about the Left? Referring to the Minister’s ‘wild spending’, Labour’s Joan Burton, TD, went on:
'For each of the past 3 years Brian Cowan has allowed spending to grow at a rate that was driven by political priorities and not at all on the level that could be sustained in the long term. If difficulties arise now he must show he has the capacity to put the national interest first.'
Ms. Burton also seems to lay the blame on unsustainable spending. She attributes this to politically driven priorities. This is contrasted with ‘the national interest.’ This begs the question: is the national interest to cut spending? If so, this begs another question – what spending would you cut or rundown? Prioritising health might push education down the agenda; prioritising education might put public transport down. It’s a mugs game. It’s a game we shouldn’t participate in.
What the Left needs is a different perspective to address the rundown in the Government’s budget. Rather than play within rules the Left didn’t create for a game we can’t win, we should shine a different light on the matter.
That is why the Left desperately needs an autonomous critique, a different context to discuss these and other fiscal matters. It desperately needs an economic policy based on the real problems of the economy. For what is happening to Mr. Cowen’s budget is a symptom of a much deeper and chronic disease. We are witnessing the logical result of a low-tax, low-spend economy that was allowed to rip loose on property and credit while ignoring enterprise development in both the public and private sectors.
In the meantime the economic cannibals will soon be walking the streets. And they will be hungry. So for heaven’s sake, guard the little ones.