Writing in these pages 18 months ago, I put forward the then heretical proposition that austerity could have been declared over at last October’s budget if the government upped their adjustment by just €400m.
Painful? Yes. Electorally toxic? Possibly, but that boat had already sailed.
My argument was this: the only hard and fast fiscal target on which everyone was agreed – and was stipulated by EU rules – was to bring the deficit below 3% of GDP by 2015. With the economy larger than expected, and with the deal secured by government on the Anglo promissory notes, the Irish Fiscal Advisory Council estimated that a total adjustment of €3.5bn over two years would be sufficient to achieve the 3% target. I argued that making the full adjustment in last year’s budget would have allowed the government to call an end to austerity before this summer’s elections and to let economic growth do the rest.
Had the government taken this course of action, we may well have had to make no further adjustment in this year’s budget. Back in 2010, the previous government had penciled in a €2bn adjustment for the last austerity budget in 2015, and the Fine Gael-Labour government didn’t see reason to quibble with this back-of-a-beermat calculation when they took office a few months later. What is clear now, of course, is that we will not have anything like a €2bn adjustment in October’s budget. It will likely consist of some way south of €1bn in new measures… perhaps even in the €400m range.
While every tax hike and spending cut hurts, in macroeconomic terms €100m here or there is not of huge significance, but the year-to-year difference between a €3.1bn and a €400m adjustment is huge. This could ‘add’ upwards of 1% to economic growth in 2015, allowing momentum to build through 2016 on the back of the first genuinely neutral, post-austerity budget.
Every €100m is a big deal, however, if you’re the one swinging the axe… or the one with your head on the block!
Over the course of the year, and particularly since their electoral drubbing in May, government Ministers have been queuing up to call for a smaller axe – or a scalpel! – and even for a reprieve for some of the poor unfortunate victims. Loose lips have given rise to great expectations, and while we can expect relief to be the overwhelming post-budget feeling, there will no doubt be a fair wind of disappointment. In terms of putting euros in our pockets, the 2015 budget is likely to be short on hard cash and long on warm words about future budgets.
In particular, we have heard a lot about possible income tax cuts. But, in the current context, every cent in tax cuts is a cent less spent – or even a spending cut – elsewhere. Typically, public spending financed by income taxes is progressive given that the more you earn, the more you contribute, and the less you have, the more you depend on public services and welfare payments. It follows then that financing income tax cuts by cutting spending elsewhere will likely result in more inequality.
The ESRI has done quite some research on the distributional impact of the sequence of austerity budgets since the crisis hit in 2008. By and large, the four budgets of the previous government were progressive, but the current regime has hit a hat-trick of regressive budgets, taking more from those who have less.
As the budget approaches, one has to trust that the new leadership at the helm of the Labour Party can succeed where their predecessors have failed and convince Fine Gael to sign up to a budget that, at the very least, doesn’t make Ireland a more unequal place to live.