Budget 2013 – Some observations

Thursday 13 December 2012 15.25

 

Budget 2013 - €3.5 billion of adjustments achieved

By Economics Correspondent Seán Whelan @seanwhelanRTE 

They cut less than they said they would.  And they taxed more than they said they would.

Overall the Budget adjustment is the advertised €3.5 billion. But up until Saturday morning the official line was still a cut to current spending of €1.7 billion, and a tax rise of €1.25 billion (including carry over from measured announced in last year’s budget).

Instead we got cuts to current spending of €1.44 billion and a tax rise of €1.43 billion.  Which must be pretty pleasing to the Labour party, as it looks more like the 50:50 ratio they were looking for in the coalition formation talks.

The extra €200m in tax is going to the Departments of Health and Social Protection, along with an extra €100m in dividends, which the Government will extract from state owned companies.

The extra spending for Health and Social Welfare is a recognition of the problems they face, but those departments also face big cutbacks just to stand still. Health in particular has to make a €701m cut to get its spending back in line from the overspend this year, and from the “demographic pressures” that push up spending.

The total cuts to the health budget are €781m, of which €308m are for “pay-related savings”.  This increases to €458m on a full year basis. That puts a lot of pressure on the Croke Park 2 process to deliver substantial savings, presumably through  changes to rosters and other working arrangements, rather than cutting back on service provision. Tricky.

The Department of Social Protection got its extra €150m – taking spending for 2013 to €20.2 billion – to cope with more people on the Live Register. Like health, its trying to cope with more claims funded from a shrinking base of taxpayers.  This position more or less forces the Government to move to taxing property (see David Murphy’s blog for more on this topic).

The package of measures designed to help the small and medium enterprise sector has been widely welcomed, and seem a sensible set of low cost changes designed to help the key job creating sector of the economy to crack on and create some jobs.  There won’t be any dramatic short term effect, but nobody ever won a marathon by standing still.

One big drag on the SME sector – which isn’t addressed in the Budget because it can’t be – is the property debt pile bearing down on what are in many cases profitable businesses, that are pushed to the brink trying to service property debts that have become unsustainable. The property debt is a direct menace to employment in the state because it is undermining either companies or the people who own them, leading to a shortage of equity and an over-reliance on debt finance in the SME sector.

The property tax, combined with the almost one third existing arrears rate in the buy-to-let sector, could combine to make matters worse in the short term.

The Government is selling the abolition of the PRSI exemption (which cost all but those on just above minimum wage a fiver a week) as the best fiver you’ll ever spend, especially if you are in the lower half of the income distribution. That’s because people in that category are less likely to have any pension provision, and are reliant on the state contributory pension, which is partly funded form PRSI contributions.

Michael Noonan says the lower paid get back a lot more than they put in to the PRSI pot, and are effectively subsidised by the better off.

But a fiver a week here, a tenner a month there on child benefit, 25 bucks a month on property tax, an extra €1.50 on prescription charges – they all stack up. A wide range of the middle income group will feel this budget, coming as it does on top of five other austerity budgets, much like a well laden camel notices all those individual straws being gently dropped onto its back.

But much play has been made of the progressive nature of the Irish tax system, under which the more you earn, the more you pay, and the extra hits on certain high income groups (though some who appear to be high income are simply high debt with a fancy car).

In the world of budget spin, one might imagine the big loser of this year’s tax changes is a hospital consultant with an extensive private practice, a very desirable residence and half a dozen income producing investment properties, a big pension fund, a love of wine and awaiting a new Range Rover in January.  If that’s you,  then you might just be feeling like the turkey that’s getting stuffed this Christmas.


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