Opinion:The Budget's projected exchequer figures are based on unrealistic assumptions, says Garret Fitzgerald
IT SEEMS to me that this is an optimistic Budget. I don't mean there is anything cheerful about it, but rather that it displays a lot of optimism on the part of the Government about our future prospects. Let me first address this issue.
The Budget indicates that in the absence of economic growth, our exchequer deficit in 2011 could be as high as €19 billion, but the Government is projecting for that year a deficit of just under €6 billion. How do they suggest that this will be achieved and how realistic are the assumptions on which these figures are based?
First, a comparison with the data for future capital spending that was contained in last year's budget reveals that the Government has decided to cut capital spending in future years by about €1.5 billion, or one-eighth. This was not mentioned in this week's Budget speech, nor was the amount or type of these cuts identified in the Budget documentation. All I have been able to determine is that a very large proportion of the reduction is to be in transport, but the Dáil has not been told what postponements or cancellations are proposed to secure this outcome.
Next, the Government believes that the value of our national output will grow by just over 10 per cent between 2009 and 2011, and on this basis, they have built in to their calculations over €4 billion additional tax revenue in the last year. It is probably right to assume some rise in tax revenue by that time, but this figure may turn out to have been optimistic.
The Government has also decided to eliminate from its expenditure provision the €1.75 billion contingency that in recent years has always been incorporated in the budget. Dropping this provision is a sleight of hand - to which, once again, no reference was made in the Budget speech. (The only hint of such a change to be found in the documentation is a blank space at the point where this figure used to appear.)
In view of the huge uncertainties that exist about our future financial situation, it would have made much more sense to have increased this contingency allowance rather than to drop it.
Finally, for a number of complex reasons, the general government deficit that is used by the EU and the European Central Bank to measure our financial performance is usually a billion or so lower than the figure that emerges from our own budget arithmetic - the exchequer balance. This year's Budget documentation states that they expect this differential in our favour to rise to €2.6 billion by 2011, which would relieve the pressure on our finances.
Together, these four factors would, according to the Government, reduce the 2011 budget deficit to just over €9 billion. So, the Government believes that to get the 2011 deficit down to below €6 billion, it will need to raise additional revenue or cut expenditure to produce a further €3.3 billion.
However, the additional amount they will need to find in 2010 and 2011 may turn out to be greater than that. For economic growth may not match up to the Government's expectations, and the decision to eliminate the contingency of €1.75 billion may prove to have been unwise.
Even if the Government's revenue expectations prove to be realistic, it remains to be seen how much of their estimated €3.3 billion shortfall can be found by expenditure cuts. If savings in spending were run to no more than €1 billion to €1.5 billion, as is clearly possible, it would then be necessary to increase tax revenue by a second bout of €2 billion during the period from 2010 to 2011.
So much for the Government's projections out to the year 2011.
A different issue is the decision to use what many people have been led by pre-Budget leaks to believe was a temporary levy to fill a permanent loss of revenue from asset-related taxes arising from property transactions. There is nothing temporary about this income levy, and, whatever about pre-Budget leaks, the fact is that it was not described as temporary in the Budget speech.
It would not have cost much to have excluded people with very low incomes from this levy. I estimate that about one-fifth of taxpayers have incomes of less than €7,500, and their exclusion from the scheme would have trimmed the revenue from the Government's €2 billion tax increases by only about €25 million - little more than 1 per cent of the total. That would have been a very small price to pay for relieving this large group of the very poorest taxpayers from a levy that they cannot afford to pay.
With regard to the abolition of the entitlement of over-70s to a medical card, the ham-fisted way that this scheme was introduced some years ago, without preparation, made it absurdly costly. In its post-announcement negotiations with GPs about the fees to be paid for this service, the Government proved itself to be incompetent as the level of payments agreed was excessive.
Finally, on the issue of public service staff numbers, contrary to a widespread view, these are generally not out of line with the needs of a country of our size. But there are some areas where numbers are excessive, eg the Health Service Executive.
That body took over the functions of the former health boards, which had an excessive number of administrators. The Government had an opportunity then to effect major staff savings, but once again, because of its incapacity to negotiate effectively with interest groups, it agreed with the trade unions that all the surplus administrative staff - many of whom are very highly paid - would be retained, regardless of whether there would be work for many of them to do.
The Minister for Finance told us in his Budget speech that on top of that excessive level of administrative staff, the HSE has since been allowed to recruit a further 1,900 administrators.
Only now has the Government finally plucked up the courage to lance this boil. How many tens of millions will it now cost to introduce what the Minister described as a "targeted voluntary early retirement scheme"? And how many staff members will in fact volunteer for these payments? If many do not, are they to remain on the HSE payroll?