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Emergency budget – the first cut won’t be the deepest 

JM Thorn 

12 April 2009

When introducing his emergency budget to the Dail finance minister Brian Lenihan claimed that the Irish state was facing “the challenge of its life”.  Given the hyperbole and sensationalism of what passes for political rhetoric these days, and the duplicitous nature of our political leaders, such claims can easily be dismissed.  However, when we consider the dramatic decline of the Irish economy we would have to concede that Lenihan’s assessment is an accurate one.  In January, the Government projected that the economy would contract over the next two years by 4.9%, by April this figure has more than doubled to 10.6%.  Unemployment is rising dramatically, and is projected to reach 15.5% by next year.  Irish exports are expected to fall by 9.2% over the next two years.  Overall the general standard of living in the country (measured in terms of personal expenditure) will fall by 11.5% over the same period (the Taoiseach Brian Cowan explicitly accepted that this will be the case).  The consequences for the public finances of such a decline are also dramatic.  There is a growing hole in the Government’s finances as tax revenues, particularly those associated with construction, evaporate.  Tax revenues are set to fall to €34.5bn this year from €40.75bn last year and €47.25bn in 2007.   Ireland's deficit is set to widen from 6% of GDP in 2008 to 10.8% in 2009. That's more than triple the limit of 3% the European Union sets for countries that use the euro.

There can be dispute over the seriousness of the economic crisis facing Ireland – the general population faces a significant reduction in their living standards while the state, given its growing budget deficit and the liabilities it has taken on from the financial sector, heads towards bankruptcy.  The emergency budget is the first serious indication of how the Government and the capitalist class plan to tackle that crisis and what it will mean for workers.   What is clear from the budget is that the Irish government has committed itself to a policy of austerity.  There will be no Keynesian stimulus package for Ireland of the type being rolled out across the globe.  This demonstrates both the weakness of Irish capitalism relative to other sates, and also the complete adherence of the Government to a neo-liberal agenda.   They are neither materially nor politically capable of breaking from the old orthodoxy even when it’s ruinous results are manifest in every aspect of Irish life. 

The myth is perpetuated that Ireland can return to golden age of the Celtic Tiger if only people curb some of the excesses that have taken hold in recent years.  Of course, the excesses the Government points to are not those of the banks and property speculators.  In the Fianna Fail account of the economic collapse it is wages and social provision, which despite being among the lowest in Western Europe, are to blame.  The corollary of this is that recovery lies in lowering wages, at the point of payment and through taxation, and cutting public spending.  What is being demanded of Irish workers is sacrifices now with the promise of better things to come in the future. 


The emergency budget has twin track approach of spending cuts (4.8 billion between 2010 and 2011) and tax increases.  Despite claims that there is fairness built into the budget, and despite its thin progressive veneer of higher income earners paying proportionally more, the burden of cuts and tax rises falls largely upon the working class.  In terms of taxation, of the extra €1.8 billion in taxes to be collected this year 81 per cent of this will come from PAYE workers.  Within this group it is those on middle and lower incomes who will suffer the greatest loss.   For example, a single worker on a gross wage of €30,000 a year will lose €900 a year or €17.30 a week. A single worker on €40,000, who is just over the average industrial wage, will lose €1,200 or €23 a week.  This comes on top of the  €400 they would have lost have in another levy last October.  If this same worker happens to be a public servant these levies are on top of an additional pension levy of €2,103 or €40 a week.  The budget also brings into income tax a whole group of workers who were previously below the threshold.  Even workers on the minimum will be forced to pay 2% of their gross pay in the income levy.  In terms of taxation the budget is deeply regressive. 


Alongside side tax increases the budget also starts to chip away at welfare provision.  The most high profile cut here is the abolition of the traditional Christmas bonus for pensioners, the unemployed and the disabled.   On its own this reduces social welfare payments by 2%.    The budget also targets the young unemployed by halving their benefits.  Rent supplement is also being cut, forcing the poorest tenants to pay more in top up rents to private landlords.  Welfare recipients and people on low incomes in receipt of rent supplement, will now pay a minimum contribution of €24 a week, up from €18 in last October’s budget.  The maximum rent to which rent supplement applies will be reduced by up to 10 per cent and the rent supplement payments to tenants will be cut by 8 per cent.  According to housing charities these changes, coupled with a substantial reduction in the social housing budget, will increase the risk of the most vulnerable tenants becoming homeless.   Many house owners will see their mortgage relief wiped out entirely after seven years. This is in sharp contrast to landlords and investors who will only be able to claim 75% of the rental income for tax purposes – but who can continue to claim beyond seven years.  Parents will see the abolition of early childcare supplement – a loss of €996 per year – with the prospect child benefit being taxed or means tested from next year. 


While workers will see their incomes reduced by the measures in emergency budget, the wealthiest people in the state remain largely untouched.  Despite all the talk of everyone sharing the pain of the economic downturn, the sacrifice made by the richest in society is minimal.  Only a mere €26 million of extra taxation is raised through increases in Capital Gains or Capital Acquisition Tax.   There are no cutbacks on special tax breaks for the pensions of company directors. There is no change in the status of tax exiles who claim to reside outside Ireland for part of the year to avoid paying taxes here. The 440 ‘high worth’ tax fugitives who are worth an estimated €30 million each will not contribute a penny.  Most importantly, there will be no increase in the level of corporation tax, which at 12.5% is one of the lowest in the EU.   No demands are made upon the profits of the capitalist class, which are far more accurate indication of wealth than income levels. Indeed, the whole budget is premised on the need to restore the profitability of capitalism within Ireland.  For the Irish Government the means to achieve this is through a general lowering of wages – this is done directly at the point of payment and indirectly through the public services provided. 

Will it work? 

The Irish government hopes that a restoration of public finances and a significant fall in the living standards of workers will provide a basis for recovery.   However, there are a number of question marks against this.  The most serious one is that Irish capitalism cannot recover by itself.   It is dependent on the global economy, the US and EU in particular, returning to strong growth.  This is by no means certain.  Most economists forecast a prolonged recession followed by a weak upturn.  There is unlikely to be a return to the level of growth that contributed to the Celtic Tiger economy.   Even it there was, there is no reason to believe that that phenomenon will be repeated.  Indeed, it was already on the wane in the early part of this decade when the foreign mobile capital that had based itself in Ireland in the 1990’s began to shift to other locations such as eastern Europe and China.  This is a movement that is unlikely to be reversed.  However, this is the very scenario that the Irish government is banking on. Its projection for economic growth in the period 2011 to 2013 is 10.8%  - so over a five-year period the Irish economy will crash and then rebound even higher.  This really is a fantasy.  It is more of a slight to of hand to allow the Government to give the impression that it will adhere to the EU’s budget deficit rules than a serious projection.  It also points to the fact that the Government’s emergency budget will fail even in the terms it was set for its self.  The likelihood is that it will be followed by other emergency budgets that will tax and cut even more aggressively. 

The fact is that for the working class the demands for sacrifices will never end.  But making sacrifices will not lead to the better future promised.   The only way to stop the attacks is to fight against them, and this means rejecting the mantra from the current trade union leadership of sharing the pain.  In capitalist society the pain cannot be shared, it can only be borne by labour. 


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