Budget 2010 will do nothing to get the economy out of recession

Tom O'Connor10/12/2009

Tom O'Connor: Budget 2010 will cause immense hardship and will do nothing to get the economy out of recession. The four billion in savings could have been found in a variety of ways which would not drive people in to unemployment, poverty and housing repossessions, as this one will.

The current approach has been driven by a business group agenda which is hell-bent on driving down wages and social welfare across the economy. More of the same will be sought next year, with further demands for wage reductions and cuts in welfare spending. If left unchallenged, this will ultimately bring Ireland in to the low wage and poor welfare state model of the USA.

The government has cut public service pay by 5% on a €30,000 earner with a sliding scale of further cuts on extra slices of income between 7.5 and 15% ranging over incomes from 40,000 up to 200,000 and beyond.

A young fireman or nurse will be earning 34,000. At present, before their tax credits are applied, they pay 36.5 % of their income in taxes: In addition to the 20% basic tax rate, they pay an income levy of 2%, a pension levy at 6.2%, a health levy of 4% and PRSI at 4%. The budget pay cut will now reduce his and her income by 1,800 to 32,200. All of the above deductions will now still apply.

The tax take on this 32,200 will now amount to 7,932, so (s)he will come home with 22,268. Before last year’s budget 09 and the supplementary budget, at Oct 08, (s)he would have taken home 28,650. In 14 months to date, the nurse and fireman have lost 6,382 which is 22.3% of their disposable income. They will also have read on the papers that only 30% of private sector workers have taken any pay cut all.

Now consider the man or woman who earns over 500,000 per annum and who is self employed. Up to now (s)he has been able to avoid paying taxes through taking advantage of the 111 tax avoidance schemes that were in operation. Over the Celtic Tiger, s/he may have earned millions per year. Irrespective of how many millions he earned, s/he would only have paid a maximum of 20% in tax by taking advantage of tax shelters.

Now given that s/he has fallen on hard times and his/her income is down to maybe 500,000, s/he will have to pay 30% while still using many of the same avoidance schemes. The government only hopes to save 55 million in these schemes in 2010 even though, it is estimated that the current value of all of these is about 4.5 billion.

We can compare this position to a physiotherapist in a public hospital who now earns about 54,000. In the past 14 months, she has seen her overall tax burden, including the pension levy of 7%, PRSI, health levy and income levy grow to 57% on income over 35,400. So she wonders why now the self employed income earner only pays 30% on income of half a million or even 10 million.

Now her income after the cuts of 5%-7.5% is 50,700. She now also has a total tax and deductions bill of 18,159, taking home now only 32,541 paying tax and other levies at 58% on the income over 35,400. Going back 14 months, her total deductions were 14,370 out of her then income of 54,000, when she paid marginal tax and PRSI at 46%. Her net income then was 39,630. She has now lost 7,000 of her disposable income, a cut of 22% in little over a year.

The fireman, nurse and physiotherapist are now led to believe that pay cuts of the same order are in store for next year, and even a further pay cut the year after. It is more than likely that many of them have already become part of the 27,000 people who are currently defaulting on their mortgages. The public are also being told that they are part of the problem with the public finances.

However, people have forgotten that 13 billion Euros were spent on tax breaks to the wealthy up to 2006 which was over half the exchequer deficit this year. Essentially, if these tax breaks were not delivered, then our exchequer deficit now would be only 12 billion.

These public servants know that they did not cause the current crisis in public finances. So also do the 425,000 people on the dole who worked hard to fuel the Celtic tiger. Many of these were young people who worked in construction at 18-19 years of age, and who are now being offered 100 or 150 per week, less than half of what they were getting, even though they are not able to find work, given the collapse of construction.

These are part of the hundreds of thousands of unemployed who know that despite cutting their dole massively, the government is doing nothing to create jobs. The so called ‘stimulus package’ in the budget amount s to a modest cut in alcohol prices and a paltry scrappage scheme. This will keep the 425,000 people on the dole.

What these jobseekers don’t know is that the government has 14 billion in reserve in the National Pension Reserve Fund, and they won’t use a single cent of it to stimulate the economy. It is clear that 7 billion of this has been given to the banks but the government will spend nothing to get the economy going.

Why? Insiders in the financial world have stated that it is the government’s intention to give this 14 billion to the banks to bolster their share capital base, while leaving hundreds of thousands on dole queues and cutting welfare payments to the point where people may even suffer ‘food poverty’, the fancy name for hunger.

The huge loss of income to the public service, welfare cutbacks and the huge cut in capital spending of over 7 billion from the government capital spending programme will prevent any possible move out of recession next year. It will drive growth next year down well beyond the 3% fall projected to at least double that number. It may well prevent the economy recovering even by 2011.

The social cost of this budget in terms of massive unemployment, a definite sharp rise of those in serious poverty, a likely strong rise in emigration, cuts in community services, and its certain effect of increasing housing repossessions will be enormous. Hundreds or even thousands of young unemployed people living in rent allowance accommodation will almost certainly be driven to homelessness.

The reason for this unthinkable harshness has been the government’s pandering to those in the high echelons of international financial markets and large business groups in Ireland. The breakdown of the public service pay talks has now been shown to be a result of a desire to please IBEC.

The government could have introduced a wealth tax and raised 1.5 billion, and could have ended 1.5 billion worth of tax breaks. It could have raised the PRSI Ceiling to force those earning over 75,000 to pay PRSI earning about 700 million. It could have doubled the income levies across the public and private service for those earning over 50,000, and this would have brought in 1 billion. It could have agreed the ICTU proposals saving 1 billion and avoiding strikes and public service reform, including lower numbers and higher productivity would have been agreed.

The government chose to do none of those things. This budget is pushing Ireland towards a Hong Kong or Taiwan model of economic and social development. It will cause immense hardship, strikes and push half the population to the brink. This is both economically and socially unnecessary. In fact it is disastrous on both counts.

Posted in: EconomicsFiscal policyWelfareFiscal policy

Tagged with: stimulusjobsBudgetsocial welfare

Dr Tom O'Connor     @justeconomics

O'Connor, Tom

Tom O’Connor is a lecturer in economics, public policy and health/social care at Cork Institute of Technology.


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