January 7, 2009

Expect tears and much angst in Budget X Factor

Posted in Irish Economy · 2 comments ·
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Think Simon Cowell and ‘the X Factor’. Think of an aspirant performer going through the motions before the denouement carried out by a cynical panel. Imagine the crestfallen starlet appealing to the audience, hoping against hope that some higher power will prevent the humiliation of being discarded. With that image in your mind, consider the scenes in the Department of Finance over the next few weeks.

We are about to see a new game in the corridors of power, which could be called ‘Budget X Factor’. Instead of ‘the X Factor panel’, “An Bord Snip Nua”, under the tutelage of Colm McCarthy (the Simon Cowell of the Department of Finance) will sit in judgment on government spending.

The objective of the Budget X Factor panel will be to cut spending dramatically. As a result, a last-gasp beauty parade will ensue. The various government departments will troop in front of McCarthy and his panel, pleading for their budgets to remain untouched. They will explain why and where they spend their money and why each cent is vital. In the desperate process, they may even perform unnatural acts in an effort to impress the panel. Ultimately, McCarthy will don the black hat and dispense the sentence. No one will be spared.

Then the sentence will be sent up to the Cabinet for debate and approval. Ministers will try to fight their corner, but the budget arithmetic cannot be ignored or obfuscated any longer.

The numbers are truly shocking. The deterioration of this State’s finances is the product of appalling economic management, unprecedented in recent global financial history. Amazingly, the same people who got us into this mess are still at the top, promising to get us out of the hole. People with real imagination would take this crisis as an opportunity to reform our 19th century Victorian form of government — which was conceived by British Mandarins — and bring it, at every level, screaming and kicking into the 21st century. But that won’t come to pass; so let’s stay with what will happen rather than what should happen. We will get budget cuts and nothing more and the chance to really change how Ireland is governed will not be seized. No one in power is likely to make the obvious connection between the fundamental way we run the State and the mess we find ourselves in. Therefore, we will yet again, limit ourselves to the mechanistic process of budget cutting.

The State faces a budget shortfall of around €17bn. This is up, in just three months, from a projected deficit of €11bn. This money has to be borrowed. The interest rate, which we will have to pay for the pleasure of borrowing, is rising by the day.

Indeed some in the financial markets are worried about Ireland’s ability to pay back. However, even taking into account this fear, the State will be able to raise the money this year. But if there is no remedial action taken immediately, there is no guarantee that Ireland will be able to, or want to, borrow indefinitely to cover its running costs. Remember, the global credit crunch applies to governments as well as everyone else. The minister ruled out new tax increases. This will definitely change, but for now at least, the axe has to fall sharply. The question is by how much and where? Given that An Bord Snip Nua has a mandate to make cuts where it can, we can only assume that those cuts will be quite severe.

Normally, countries in these types of situations borrow heavily to accelerate public infrastructure projects. For example, Finland, Sweden and Norway allowed their debt GDP ratios to rise rapidly in the early 1990s and provided a safety net for their populations in the face of a severe downturn. Britain is spending and borrowing similar fortunes, as is the US and Germany.

In Ireland, there is no history of this type of rational behaviour. We allow public spending to skyrocket when the coffers are full and when we don’t need to spend. Conversely, having blown all the cash, we cut when times are bad, precisely when we should be spending. Therefore, when the rest of the world is pump priming, we will be deflating. Thus the best we can hope for in 2009 would be for the State to keep spending in line with its October forecasts of 6pc of GDP. This would still mean that we would be borrowing around €11bn. The implication of such a target is a €5bn to €6bn reduction in spending.

A quick back-of-the-envelope calculation reveals that nowhere is safe. Total government spending is around €55bn annually. Of this, €20bn is the annual cost of the pensions and salaries of public servants. It is inconceivable that a fiscal adjustment will not involve reductions in public servants’ salaries.

Before nurses and teachers complain that they are being made a scapegoat for other people’s mistakes, your position is understandable; but the State has run out of money and going on strike or walking out won’t make the money come back. Equally, with social welfare transfers accounting for some €17bn, it is again hard to imagine trying to save €5bn without touching some welfare spending. Equally, the budget for day to day running of departments will be slashed.

At the same time, many politicians are saying that capital expenditure can’t and shouldn’t be touched. Capital spending is a tricky one but let’s just say that some capital spending brings jobs and others just bring debts.

Take the Bertie Bowl, for example. Had the vanity project of the former Taoiseach been built — at a cost of €600m — it would have been termed “capital spending”. By now, with Croke Park easily accommodating every big game in Dublin, there is argument as to whether we need two large stadiums let alone three. The Bertie Bowl at this stage would have tumbleweed in the terraces and weeds on the pitch, yet it would have been considered capital spending and, therefore, to the uncritical eye, would have been sacrosanct.

There are good and bad capital projects. The bad ones, sometimes the ones with the most entrenched local support, need to be culled. The good ones, the ones that will bring real benefit, need to be accelerated.

As the lights flicker late in the halls of the department in the coming weeks, expect much tears and angst, as the Budget X Factor and our own financial Simon Cowell swing into action.

The prize, national solvency, is huge; the purse, €5bn, substantial; and the odds of success, very long.


  1. Tim

    David, wait and see the devastation that will be caused for generations by the cuts in education. By mid-February, the bite will be felt. By October 2009, disaster will be clear, with substitution gone, free books for poor kids gone (thus, they will be ashamed to go to school and will stay home – the lost children: increase in crime and cost of prison time for them instead of education spending/investment in them).

    The lost jobs in teaching; dole payments to them. The cut the early retirement scheme for older teachers who want to leave, yet cut the jobs of the younger ones who want to stay – just like Dublin Bus, today.

    These cuts are anomalous.

    If we always do what we’ve always done, we’ll always get what we’ve always got. We MUST INVEST in education: we must invest in the future of our country.

    Capital spending being sacrosanct should focus, in the first instance, on HUMAN capital.

  2. [...] 2: Given this: The State faces a budget shortfall of around €17bn. This is up, in just three months, from a [...]

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