INSIDE POLITICS:The triple challenge of the banks, cuts and raising new revenue leaves the Government with an unenviable task of public persuasion
THE TAOISEACH and his Ministers will head off on holidays this weekend knowing that when they return at the end of August they will be faced with agonising decisions on the public finances, taxation and the banking crisis which will determine their own and the country’s fate for a long time to come.
The broad strategy for dealing with the property crash and its impact on the banks is now in place with the publication of the Nama Bill, although the crucial figure of the discount that will be applied on the banks’ “bad loans” has still to be announced.
On the public finances the McCarthy report has given the Government a menu of savings to choose from. There are no easy options, though, and the bottom line is that serious cuts in health, education and social welfare cannot be avoided as these three areas account for the bulk of Government spending.
The same is true on the tax front, with the Commission on Taxation expected to come up with recommendations some time next month for a property tax that will hit every household, along with taxes on water and fuel to put the State’s revenue-raising capacity on a sustainable basis for the future.
There has been a chorus of disapproval from vested interests of all kinds to the outline of the Government’s approach to each of the three major problems besetting it but, with national survival at stake, the coalition will simply have to face down its detractors, regardless of the political consequences.
At the next election voters will have an opportunity to pass judgment on the party that, through a mixture of incompetence, complacency and back luck, exposed the country to such an astonishing reversal in fortunes. Holding Fianna Fáil accountable for its past sins is the easy part. The challenge for the Opposition, and everybody else, is how to respond coherently to the Government’s route map for getting us out of the mess.
The main criticism of Nama is that it exposes the taxpayer to enormous potential risk. The problem is that there is no way out of the banking crisis that doesn’t put the taxpayer at risk. The “bad loans” simply have to be taken off the balance sheets of the banks to enable them to function again, whether that is done through nationalisation, a toxic bank solution or Nama.
The first step towards restoring the country’s banking system to health was for the Government to have a coherent plan because prolonged inaction would have been a recipe for disaster. The fact that Brian Lenihan has come up with some solution is, in itself, the first step on the road to recovery but only time will tell whether Nama works.
Going on international experience, Nama has a good chance in the long run of being able to recover the money it pays over to the banks for their “bad loans”. Its prospect of achieving that objective will depend on the restoration of the economy to health and that will depend on the success of the other two prongs of Government strategy relating to the public finances and new tax-raising measures.
The McCarthy report has certainly given Lenihan plenty of material to work with in dealing with the public finances but he can’t escape the fact that public service pay and social welfare account for the bulk of spending. Cuts in one or both of those areas simply cannot be avoided.
The depressing aspect of the response to McCarthy has been the unremitting stream of complaint from almost every sectoral interest. The fact that the country is in the throes of an economic disaster that could beggar us for generations does not seem to impinge on most of the critics who denounced McCarthy.
Their narrow-mindedness was exposed in a letter to this newspaper during the week from a retired 75-year-old bank official, Ray Doherty, who calculated that he was receiving €26,000 a year from the State in various benefits, on top of his defined benefit bank pension. Doherty described this payment to himself as “economic madness” given the current state of the public finances and the needs of the truly less fortunate.
It was a rare example of a citizen putting the common good ahead of his own financial interests and was so notable because such a civic spirit has been so lacking in almost all comment on McCarthy. The Government will have to hope there are enough people like Doherty who can see the bigger picture and accept reductions in their State benefits so that the really vulnerable can be protected.
One of the difficulties in trying to persuade society as a whole to accept the need for sacrifice is that once again middle income private sector taxpayers are being thrust into the role of “the poor bloody infantry”. People on very modest incomes are suffering pay cuts, watching their pensions evaporate, being hit by higher taxes and in many cases losing their jobs. Meanwhile public servants, who are on average far better paid, have job security and marvellous pensions, have only been asked to pay a pension levy which is modest in relation to the benefit involved.
One way the public might be convinced of the need for sacrifice is if the political class, and other privileged public servants such as judges, took a substantial cut in their incomes and extraordinarily generous and pensions. True, Ministers have taken a number of pay cuts and TDs have been hit by the pension levy but it has happened in a piecemeal way that has not convinced the public.
A truly dramatic gesture such as a 50 per cent cut in ministerial pay and pensions and a complete reform of scandalous perks like State cars and drivers for Ministers and judges would show voters how serious the current position is. People might even begin to believe that everybody will suffer pain in equal measure for as long as the crisis lasts.