Irish Mini/Emergency Budget 2009: Normally on the Saturday before the Budget, we would have the White Paper on Receipts and Expenditure which would give comprehensive detail on the opening position. That is a constitutional requirement.

Because this is a Supplementary Budget, the Department have confined themselves to issuing summary data on the pre-Budget numbers and economic forecasts. These were made available last Thursday but surprisingly little attention has been paid to them. However, they do provide some hard information in an area where speculation is rife.

For example, we now know the size of the task facing the Minister. We were told that the General Government Balance (GGB), commonly known as the overall deficit, will be 12.75% of GDP in the absence of corrective action. In early January, this was put at 9.5% and last October it was 6.5%. In money terms, the deterioration is around €11 billion, a rate of decline that none of us has ever witnessed before. Remember, this has little to do with the property market which had ground to a halt long before October 2008.

As GDP is now around €170 billion, 12.75% equates to a GGB of minus €21.7 billion. In January, the Government committed in Brussels to keep this to 9.5%. The difference is €5.5 billion but here the trouble starts because this is a net gap which dos not equate to the gross numbers bandied about.

Before going any further, we should define what is meant by a Budget Package. Lets start with last October’s Budget. Then, the Minister increased taxes by about €2 billion and pared spending by another €2 billion, to give a €4 billion gross package. In an earlier exercise last July he knocked €1 billion off the prospective 2009 deficit and, of course, the pensions levy and other measures introduced in February 2009 were designed to save a further €2 billion in a full year. To-date, therefore, the measures taken amount to a not inconsiderable €7 billion. The early measures picked the low-hanging fruit and the task is becoming progressively more difficult.

We will define a package as the full year effect of a combination of gross tax and spending measures. The two key words here are gross and full year. Any measures introduced in Tuesday’s Budget will be effective for eight months only, i.e. two-thirds of a year. It follows that our gross package of measures must be reduced by one third to get the impact on the 2009 Budget. Second, we must allow for negative buoyancy.

When times were good and the Minister unveiled tax cuts and spending increases, he always added a substantial sum to prospective tax revenue to reflect the higher income, VAT and other tax receipts as the give-aways were spent and the money percolated throughout the economy. Now, the reverse is the case and he must allow for negative buoyancy as the cutbacks weaken economic activity. It is sad that we have to do this at a time when the US and the UK are cutting taxes and boosting spending, however, we have no choice because when times were good we blew the proceeds on spending and tax cuts.

Estimating buoyancy is difficult because it depends on the nature of the cuts and the response of those affected. For example, some capital cuts (a computer in a school) might have no knock-on costs while others (a construction project) might have severe consequences. In the 2008 Budget, the Minister estimated buoyancy at 30% of the net give-aways. Last October, he put it at 26% of the cutbacks. I propose to use a lower 15% figure reflecting the fact that people have already stopped spending and that the tax increases may be loaded in favour of income taxes.

We are now in a position to calculate the gross annual package required to lower the GGB by €5.5 billion. First, we annualise it which brings it to €8.25 billion; then we allow for negative buoyancy which brings us to €9.7 billion. To get the GGB deficit back to 9.5% at this stage would require a gross package of almost €10 billion cuts. This is clearly out of the question, hence the emphasis recently on bringing in a deficit “as close as possible” to 9.5%.

Let us look now at what might be feasible. Remember, the objective is not, per se, to satisfy Brussels but to regain the confidence of the financial markets, without which we will not be able to borrow and will be bankrupt. The recent S&P downgrade, though expected, was a timely reminder of what lies in store if we fail.

Department of Finance, Dublin

In recent weeks, I have suggested that a €4.5 billion gross annual package was the most the economy could bear but might be sufficient to keep the markets happy. I am still of that view.

Obviously, a €4.5 billion package would have a much lower net impact on the prospective deficit. Scaling it back to eight months lowers it to €3 billion and the negative buoyancy effect further reduces it to €2.5 billion. This would lower the 2009 GGB from minus €21.7 billion to minus €19.2 billion, or 11.5% of post-Budget GDP. This is too far away from 9.5% to keep the markets happy.

Pat McArdle

Now we need a bit of good luck. In the past six months the news has been all bad so a positive surprise could be on the cards. What this might be I have no idea, but my experience of government accounting tells me that it is always possible to find something.

For example, last Autumn there was speculation about third level pension funds. These liabilities, which in the past were funded by university and semi-state contributions, have already been taken over by the Government but the transfer of the accumulated funds had to be negotiated with those concerned. As these funds come from outside the Government sector, they would be classified as a receipt in the year of transfer. The amounts involved are big, of the order of 1% to 1.5% of GDP. The Department has had six months to prepare and this could be the rabbit in the hat in Tuesday’s Budget. If they can swing it, this would lower the 2009 deficit to 10% or 10.5% of GDP which should be enough to carry the day.

 Pre Budget Outlook Aggregate Figures 

Pre Budget Gross Expenditure Position