For all the commentators moaning and groaning over Kevin Rudd’s $42 billion stimulus package, one might look insead to the Irish Government’s approach, detailed overnight with over $A25 billion dollars in cuts to government spending over the next four years.
Ireland is crippled; the economy was the first in Europe to go into recession and the slump is now forecast to reach 10% this year. Government revenues are plunging, it can’t raise money in the markets because its credit rating is threatened and it can’t run up big deficits without being disciplined by the European Commission. The collapse in the property sector is still the major driver, as revenue figures for January show.
Tax revenues fell 19% in the year to January, or 900 million euros. Tax receipts worth 3.7 billion euros were collected in January compared with the 4.6 billion euros collected in the same month of 2008.
And the main culprit are the property-related capital gains tax (CGT) and stamp duty: both are down 72% on the previous January.
To get the Government’s budget deficit back to even keel by 2013, as required under EU rules, the Government has revealed cuts totalling 12 billion euros, or over $A25 billion (at current exchange) rates.
First up is a cut of over $A4 billion (2 billion euros) from government spending as the economy contracts at a forecast 10% this year, possibly the worst in the developed world.
In his speech to the Irish parliament, Prime Minister Brian Cowen detailed the enormous hacks:
The Framework agreed with the Social Partners endorses the fiscal plan submitted to the European Commission and commits to working together to eliminate the Current Budget deficit by 2013.
The difficulty in achieving this cannot be overstated. The Social Partners have agreed that a credible start requires an immediate adjustment of the order of €2 billion. This must be followed with adjustments of €4 billion in 2010 and again in 2011, €3.5 billion in 2012 and €3 billion in 2013. Today we are announcing the first steps towards achieving those targets.
Considering Ireland sparked the stupid bidding war late last year by guaranteeing bank assets and debts, the latest budget package from the Government is an admission that the country has run out of money and options.
So it has to cut and cut heavily, risking a brawl with the unions, voters, business and virtually everyone else. It is a no-win situation and the cuts could very well intensify the downturn. It’s the very thing every other major government around the world isn’t doing.
From being lauded as a low tax, fast growing “Celtic Tiger” economy, Ireland is now the stray of Europe: not even the UK will be as crunched this year. And to think there were quite a few in business, academics of the conservative kind, trade unionists and a few others who saw virtues in the Irish approach.
The country has been revealed as being incompetently run, with a grubby and at times corrupt business class (the Government took over the Anglo Irish Bank last month after a run on it threatened 100 billion euros of deposits).
The bank’s former chairman and CEO (the one person), had been spring with billions of euros of undeclared and secret loans, while similar loans were made to other board members. The former chairman and CEO moved his loans to at least one other bank for years every time there was an audit. At least one former CEO and other senior managers were in on the scam. The country’s financial regulator quit early because of his failure to police it.
The first round of cuts include a pay freeze and a sliding scale levy on 350,000 public servants to help pay for their state-backed guaranteed pensions. That’s really a pay cut on many public servants, designed to save about 1.4 billion euros.
Prime Minister Brian Cowen also said pay rises provided for from 1 September this year and June next year, will now be delayed to save a further 1 billion euros in 2010.
There will also be a 95-million-euro cut in overseas development aid, an 80-million-euro saving on professional fees (lawyers and accounts will be upset) and a 75-million-euro reduction in early childcare payments.
As well “efficiencies” (that mythical beast of Government number crunchers) will contribute a further 140 million euros of savings, there will be a 300-million-euro cut to all capital allocations this year.