IN THEIR reports on the Irish economy this week, both the Economic and Social Research Institute (ESRI) and the International Monetary Fund (IMF) agreed the Government must meet its commitment to make a €3 billion reduction in spending in the December budget. Both organisations have warned of the high price of failure to achieve that goal. For the Government, it would mean a loss of international credibility and also weaken public confidence in its efforts to achieve fiscal consolidation by 2014.
The reaction of international bond markets – which are the ultimate arbiters of how much the State can borrow and at what price – would likely be strongly negative. Any obvious loss of momentum by Government in meeting targets to stabilise the economy over five years would leave Ireland vulnerable to market pressures. As the IMF has indicated “the path from crisis to stability and recovery is a narrow one”, and it suggests the required adjustments may be larger than the Government envisages.
Taoiseach, Brian Cowen has reaffirmed in recent weeks his Government’s commitment to achieving savings of €3 billion. These will involve spending cuts (current and capital) a broadening of the tax base and some revenue-raising measures. One particular IMF concern has been with a lack of detail in some of the Government’s plans, where the size of future annual spending cuts is identified, but without a clear indication of where cuts can be achieved. More information, it suggests, would raise confidence in the durability of the Government’s plans. The Government’s and Opposition’s reticence may well reflect a political concern not to give too many hostages to fortune too soon.
Nevertheless, five months from the budget, an unnecessary degree of confusion surrounds possible measures, and not just in the ranks of Government. Last year the Commission on Taxation recommended the introduction of a property tax at the earliest possible date. But so far the Government has been non-committal about a tax that could raise – according to ESRI estimates – close to €1 billion annually, while allowing relief for the poorest one-third of the population. Fine Gael remains opposed to a property tax. It suggests the budget deficit can be cut by other means - but without disclosing where their axe would fall.
A year ago both the commission and the Government’s expenditure review committee headed by Colm McCarthy recommended the immediate introduction of water charges, initially via a flat rate pending the installation of domestic meters. But Minister for the Environment, John Gormley, who favours metering, is opposed to a flat rate. He has said householders would not be billed for water charges before mid-2012 – the deadline for the next general election. Labour, which led the abolition of water charges prior to the 1997 general election in which it ceded coalition partnership with Fianna Fáil to the PDs, does not favour their reintroduction. This lack of political transparency on some of the major revenue-raising opportunities is regrettable. The December budget has become a more daunting challenge.