This is an unedited version of my article for the Irish Examiner (December 8, 2011) covering Budget 2012.
As Peter Drucker once said “Effective leadership is not about making speeches or being
liked; leadership is defined by results not attributes.” By Drucker’s measure
of leadership, Budget 2012 is a complete failure.
The Budget was launched with much pomp and circumstance. But
in the end, the highly emotive language of ‘change’, ‘long-term thinking’ and
‘fundamental reforms’ served to cover up the return to the failed policies of
the previous Government. No real change took place, and no real reforms were
launched.
While much of the media attention is focused on the specific
headline measures, especially those applying to the poor and the unemployed,
very little analysis has been deployed to cover the budgetary dynamics – the
very raison d’etre of the current austerity drive. Let’s take a closer look at
what the Budget 2012 promises to deliver on the fiscal consolidation front and
what it is likely to deliver in reality.
According to the Budget 2012 Ministerial Duet of Brendan
Howlin and Michael Noonan, public expenditure reductions envisioned under the
budget will amount to €1.4 billion in current spending and €755 million capital
investment cut. These are gross savings, that will have second round effects of
reduced associated tax revenues and thus their impact on deficit will be lower
than envisaged.
Capital savings will come from mothballing a handful of
white elephants carried over from the Bertie Ahearn’s era, but these will cost
jobs and neglect in existent capital stock. Coupled with changes to CGT and CAT
and Dirt, these measures will further depress investment in the economy that
continues to experience collapse in this area. Yet, absent investment, there
can be no jobs.
Perversely, the FG/Labor government thinks that the only
capital investment worth supporting is that in property. The economy based on
high value added services and knowledge and skills of its workforce is now
fully incentivised for another property boom and fully disincentivised to
invest in skills and entrepreneurship. The latter disincentives arising from
the upper marginal income tax rate of 53% for all mortals and a special
surcharge to 55% on self-employed. Never mind that self-employment is usually
the first step toward enterpreneurship and business investment.
Short-termist reductions in one-parent family and jobseekers
benefits are counterproductive to supporting large group of single parents in
their transition to work. In the place where real reforms toward workforce
activation should have been deployed, we now have a “all stick and no carrot”
approach.
Health budget is one of the three mammoths of the fiscal ice
age, with total spending this year projected to reach €12.83 billion this year,
up 10.5% on 2010 levels. Instead of rationalising management systems at the
HSE, the area where the bulk of waste resides, the Budget is achieving
‘savings’ by charging middle class insurance holders more for the very same
services. A new tax, in effect, is now called ‘savings.
This Cardiffescue approach to accounting for sovereign
funding and expenditure flows creates an illusion of something being done about
the constantly rising current expenditure, while avoiding challenging
operational and structural inefficiencies in public sector spending.
Budget 2012 is a mini-insight into a collapsed capability of
a leadership system unable to cope with fiscal pressures and incapable of
change.
Nothing else highlights this better than the host of new
taxes that accompany the incessant drone of ‘jobs, jobs, jobs’ refrain from the
Government.
Take the illogical hikes in VAT and fuel-related taxes. A 2%
increase in the cost of shopping in Ireland, coupled with increase in the cost
of petrol and diesel and a massive increase in tobacco taxes here will create
tripple incentives for consumers to flee Irish retail sector in favour of
Northern Ireland and to transact in the Black markets. None of these
substitution effects are priced into Government budgetary projections, despite
the fact that an error of omitting direct substitution effects of tax increases
would have been a fatal one for an undergraduate student of economics.
The entire exercise looks like the repeat of Brian Cowen’s
Grand Strategy of waiting until something turns up and rescues us. Thus, behold
the rosy budgetary projections for 1.6% GDP growth in 2012, published just days
after OECD confirmed its forecast for 1.0% growth and ESRI published its
outlook with 0.9% growth projection.
These differences are material. Should the Budgetary
assumptions on growth fail to materialize, the cuts and revenue measures
envisioned by the Government will fall far short of what will be needed to keep
the headline general government debt to GDP ratio at bay.
Karl Marx famously remarked that history repeats itself twice,
first as tragedy, second as farce. Based on Irish Governments’ policies over
the last 4 years, history ultimately blends into a farcical tragedy once
leadership failures become a norm. Welcome to the farce of the long-term
fundamental non-reforms of this new Government.
Table above, taken from the IMF WEO September 2011 database clearly shows that not a single euro area member state is currently repaying its debts.
