Today, the Government of Ireland announced its austerity budget for 2011 and a critical budget it is, considering that the country is standing on the precipice of fiscal insolvency. These measures were necessitated by the promise of a European Union/International Monetary Fund bailout package, think of it as a sort of bribe to get things in fiscal order. Without the €85 billion bailout, Ireland most likely would have been unable to both support its banking sector and provide services to its citizens. Basically, now Ireland is owned by the EU/IMF until proven otherwise.
Here are some of the highlights of what is most likely the Cowen government's final budget in a last gasp effort to balance a €19 billion deficit:
1.) The government proposes a package of tax increases and spending cuts that will total €6 billion.
2.) Civil servants just starting out in the "business" will see their pay cut by 10 percent. As an added measure, 6 percent of the entire public sector (or 18,500 workers) will be made redundant and the pensions of those still working will be reduced by up 8 percent. Public service pensions will be reduced by an average of 4 percent if the pension is greater than €12,000 annually.
3.) On the upside, the Prime Minister's salary will be reduced by an additional €14,000 to €214,000 bringing the total cuts to the Prime Minister's salary over the past two years to €90,000 or 28 percent. Government ministers will see their pay reduced by a total of €60,000 or 23 percent. Nice of them to share in the misery they helped create, isn't it?
4.) Of the €6 billion changes to the county's bottom line for this year, €2.1 billion will come from a net reduction to recurrent current spending (€2.2 billion gross), €1.8 billion will come from cuts to capital spending and €1.4 billion will be raised through tax increases. The largest savings will be made in Health and Children (€743 million) and Social Protection (€873 million).
5.) One-fifth of the government's contributions to the bailout package will be generously "donated" by a withdrawal from the National Pension Reserve Fund (NPRF) and other domestic cash that was just lying around collecting dust. As the government says "...it is not credible to suggest we could have retained a sovereign wealth fund while expecting others to make resources available to us.". I'm certain that the pensioners of the future would agree. For your information, the NPRF was created in 2001 to meet the projected demands that would be placed on Ireland's social welfare and public pensions after the year 2025 (due to demographic changes). The funds were not to be drawn down until at least 2025. I guess someone forgot to tell the Cowen government that their withdrawal of €17.5 billion out of the €24.5 billion in the plan this year was 15 years ahead of schedule.
6.) A maximum pay level of €250,000 will be imposed on the public sector and will apply to the next President of Ireland. I'm certain that those who saw their minimum hourly wage cut by €1 are breathing a sigh of relief.
7.) The top marginal income tax rate will be maintained at 52 percent. The top corporate tax rate will also be maintained but at a much lower level; the rate of 12.5 percent is the second lowest amongst EU Member States. I would imagine that the unemployed Irish are thrilled to hear that.
8.) The maximum payment for weekly schemes under the country's social welfare system will be reduced by €8 per week. This will save €397 million in 2011.
9.) The Air Travel Tax is being reduced to €3 temporarily.
...and last but not least:
9.) All bookmakers taking bets from Ireland will pay 1% betting duty on those bets in the same way that betting shops currently do.
In addition, let's not forget that the National Recovery Program announced in late November already cut €1 per hour from the country's National Minimum Wage and increased the country's VAT to 22 percent in 2013 and 23 percent in 2014.
All of these measures combined will bring the country's budget deficit to 9.4 percent of GDP, down from the earlier estimate of 12.2 percent. Had all of the austerity measures undertaken in the past two years not taken place, the deficit will be a rather unhealthy 20 percent of GDP at this point in time. Just to show how accurate the Cowen government's economic projections have been, it was assumed one year ago that a budget "adjustment" of €7.5 billion would have led to a deficit to GDP ratio of 3 percent by 2014. Not so. Apparently, the government underestimated the cuts necessary to achieve that goal by half; a total of €15 billion in adjustments is now necessary because economic growth projections were overly optimistic. Does this overly optimistic growth projection scenario sound familiar to anyone?
One thing that really hurt Ireland was a rather massive 7.6 percent drop in GDP in 2009. That alone, would have caused the country's debt and deficit to GDP ratio to rise had all else remained constant. Interestingly enough, today's budget projects real GDP growth of 2.75 percent annually to 2014 (just in time for the next recession if it doesn't happen sooner!). Perhaps the fact that between the years 2000 and 2008, public spending rose by 140 percent compared to a CPI increase of just 35 percent may have had something to do with the problems faced by Ireland's government today. As well, the proportion of income earners who paid no tax rose from 34 percent in 2004 to 45 percent this year. Take note President Obama.
As an aside, the loan losses by Irish banks that were caught with their pants down when the real estate market collapsed totals between €70 billion and €80 billion, nearly one-half of Ireland's total GDP for this year. That's enough to bring any nation to its fiscal knees, unless of course, they have Ben Bernanke on location with a pocketful of fiat currency. Here's a quote from today's speech by Ireland's Finance Minister Mr. Brian Lenihan:
"Public debate of our current difficulties is focused, almost exclusively on our banks. Much of what is said is plain wrong. For example, it is regularly claimed that the taxpayer will end up bearing most or all of the cost of the banks’ bad loans. This is not the case. As the Governor of the Central Bank has previously indicated, over the period 2008 to 2012, the total loan losses of the domestically-owned banks are expected to reach €70-80 billion, equivalent to about half of this year’s GDP. Loan losses on this scale are unforgivable. They reflect the recklessness of lending decisions during the bubble years and the weakness of the previous regulatory framework. We must ensure they never happen again.
What is almost entirely overlooked, however, is the fact that tens of billions of these losses have been absorbed by the private shareholders in the banks. It is clear there has been no taxpayer bailout for bank shareholders....
It’s true the State has had to inject large amounts of capital into the banks. In return, the State will own the bulk of the banking system. The use of funds in the National Pensions Reserve Fund to recapitalise the viable banks is necessary to ensure that these institutions can serve the needs of the economy."
Oh the poor bank shareholders, most particularly, the executives at all of the banks who saw the value of their incentive plans plummet.
It would appear that the main difference between the banking systems of Ireland and the United States is that the United States has a Federal Reserve Chairman who is not afraid to dump trillions of dollars into a moribund banking system operated by his buddies on Wall Street and Ireland doesn't.
It is interesting to see what has happened to Ireland and its near fiscal collapse in comparison to the current situation in the United States where bipartisan wrangling over cuts to the country's $1.294 trillion deficit in fiscal 2010 and $13.8 trillion debt are taking place. I look at the situation in Ireland as a template for economic recovery that will be used by other debtor nations. There are so many similarities between the situation in Ireland and the situation in the United States; a booming economy that went bust, a high-flying real estate market that collapsed bringing the country's banking sector to its knees, stubbornly high unemployment and an economy that is lukewarm at best. Seeing Ireland's government use tools like tax increases, cuts to social programs, cuts to the country's minimum wage and a raid on sovereign savings (pension plans) in an 11th hour attempt to bail themselves out of a hole should send a signal to the rest of us. Governments, who are largely to blame for the fiscal mess that we are in because of their spend and tax philosophy, will think nothing of bailing out their economies on the backs of the "sweaty masses". No matter who is to blame, you know who will pay.
As I've said before, politicians are not particularly well known for original thinking. Ireland's government has now supplied the fiscal template necessary for governments requiring a bailout.