OPINION:THE IMMEDIATE public reaction to the most savage budget in decades has been muted but most Government TDs are under no illusions that when the tax increases bite at the end of May the response will be an angry one. The only unknown is how strong that anger will be and how it will manifest itself, writes STEPHEN COLLINS
Normally on budget day interest groups kick up a stink on behalf of the relatively small number of people they represent. This year, the silence has been eerie, mainly because the large body of PAYE workers who are being hammered by the Budget have no one to directly represent their interests.
In part, the muted reaction may also be attributed to the fact that many people had already come to terms with the fact that a cut in their living standards was inevitable, given the state of the public finances.
It is probably more to the point, though, that most income earners will not feel the pain until they get their pay packets at the end of May – so many still have no idea how much they are going to lose in take-home pay. When that penny drops, the mood could turn nasty but, by that stage, the Budget debate will be long over.
The public mood on the eve of the local and European elections on June 5th will not be helped by the fact that, as Brian Lenihan made clear in his Budget speech, this is simply the first instalment and further pain is on the way next year and the year after. A property tax, cuts in social welfare, more public service pay cuts and the taxation of child benefit are just some of the items on the agenda for next year’s budget.
Politically, it would have made more sense to get more of the pain out of the way this year. The balance in Tuesday’s Budget package was roughly 60 per cent tax and 40 per cent spending cuts.
Fine Gael suggested almost the exact opposite, with two-thirds coming from cuts and one-third from tax increases.
The Government’s approach will spread the pain out over three years, but that could ultimately provoke a disastrous political outcome for both Coalition parties at the next general election. The worst of all possible worlds would be to get most of the pain over with by election day but suffer the full political consequences as John Major’s government did in 1997.
There are two reasons for the Government’s heavy reliance on extra tax this year – one is political and one is economic. On the political front, tax levies are the easiest and surest ways of raising necessary revenue quickly. The taxpayer has no choice: the money simply disappears from pay packets. By contrast, spending cuts take time to implement and almost inevitably provoke a much more hostile reaction from those affected. The street demonstrations of the pensioners last October frightened the Government, and Ministers were determined to avoid a repeat this time around. The nightmare scenario was widespread protests and strikes in opposition to spending cuts that could have paralysed the country and made the economic situation worse. In Greece, that prospect has got in the way of action to solve its equally bad economic problems.
The reaction so far would indicate that taxing people was the easier political option. While callers to the Pat Kenny programme on RTÉ Radio yesterday took out their frustrations on the Minister for Finance, there is no sign of organised protest against the tax increases. The trade unions have always favoured tax increases rather than public spending cuts that directly affect their members and so are in no position to really object.
The Government’s immediate priority was to get the Budget through the Dáil and implemented as quickly as possible in order to stabilise the public finances for the year ahead. The reaction to the Budget would indicate that it can achieve that objective, even if there is a great political cost in the longer term.
Stabilising the public finances this year is only the first step. The Minister is already preparing the ground for serous cuts in public spending next year. His decision to establish a review body on higher remuneration in the public sector to benchmark pay against that in similar-sized EU countries is clearly the first step in a reverse benchmarking exercise.
It would have been politically impossible to impose public service pay cuts this year, on top of the pension levy. But next year is a different matter. The same applies to serious cuts in the welfare budget which will also be required if taxes are not to rise again by a similar amount in 2010.
The Government’s central problem is that its own policies have contributed significantly to our current economic woes. The problem was not just the dependence on the construction industry and the creation of special incentives to keep it booming. The adoption of a deeply flawed and politically dishonest benchmarking process helped propel the public finances into a crisis from which it can only emerge when spending is brought under control.
However necessary much of the Government’s budgetary policy, the public will be deeply reluctant to accept painful solutions from the people who created the problem in the first place. That is something the Fianna Fáil-Green Party Coalition will have to live with.
The Opposition parties have been attempting to shape the public response to the Budget, attacking the Government for all they are worth. Their primary goal is to hold Fianna Fáil to account for the current sorry state of the economy and inflict a severe political price on the party in the longer term for the way it has run the country over the past 12 years. The elections on June 5th will be the first concrete test of whether that strategy is paying off.
Stephen Collins is Political Editor of The Irish Times