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Saturday 21 October 2017

Dan White: €15bn - Can it work? What does it mean for us?

The Government hopes its programme of €15bn spending cuts and tax increases over four years will persuade the bond markets to start lending us money again. But what does €15bn of "adjustments" mean in practice and can it possibly work?

Q Why do we have to slash public spending and increase taxes now?

A In last year's Budget, the Government increased taxes and cut spending by €4bn. This brought to almost €15bn the total of spending cuts and tax increases imposed by the Government since the October 2008 Budget. For a brief period, it looked as if the aggressive therapy was working. That was before the Greek financial meltdown in May and last month's shock announcement that bailing out Anglo Irish Bank could cost up to €34bn. This completely shattered the bond market's confidence in Ireland, meaning the Government can no longer borrow the money it needs for day-to-day bills. The cuts and tax increases implicit in the Government's announcement are the minimum required to persuade the bond market to lend to us again.

Q You mean that, having already cut spending and raised taxes by a cumulative €15bn, we are going to have to turn around and do it all over again?

A Afraid so. Having assured us last December that the worst was over and that we had "turned the corner", it now transpires that Brian Lenihan was merely limbering up for the main act. This means that the total of tax increases and spending cuts that will be imposed on the Irish economy between October 2008 and the end of 2014 will be a massive €30bn. That's the equivalent of almost all of this year's likely tax revenue of €31bn and a quarter of the value of our economic output, which currently stands at about €125bn.

Q Brian Lenihan has stated that these cuts and tax increases will have to be “front-loaded”. What does this mean in real English?

A If the €15bn was to be evenly split over four years it would work out at something like €3.75bn every year, i.e. the equivalent of last December's Budget every year for four years. Unfortunately that won't wash with the bond markets, who want to see spending cuts and tax increases now. This means at least €5bn of the spending cuts and tax increases, and possibly as much as €7bn, will be imposed this December.

Q €15bn is a huge number. What does it mean for ordinary Joes?

A If you think the tax increases and public spending cuts you've seen up to now have been harsh, then the bad news is that you ain't seen nothing yet. €15bn is the equivalent of almost four-fifths of the €19bn public sector pay bill, two-thirds of the social welfare budget of about €22bn, almost twice the €8bn we spend on education and equal to the entire health budget. The sort of spending cuts we are about to witness are going to leave everything we have experienced so far in the Mickey Mouse category.

The Croke Park deal, which guaranteed no further public sector pay cuts or voluntary redundancies up to 2014, will be torn up.

Pensioners, who escaped last year's social welfare cuts, won't escape this time around with €5 likely to be lopped off the weekly pension with other social welfare payments set to be slashed by a further €10 per week. These spending cuts will be accompanied by hefty tax increases, likely to include water charges and a property tax, as well as further taxes on incomes.

Q But will it work?

A That's the €64bn question. Imposing €30bn of public spending cuts and tax increases on an economy the size of Ireland's in the space of just over six years, a full quarter of the value of total annual output, is something which has never been tried before. The danger is that the "cure" might prove fatal to the patient and plunge us into an even deeper depression from which it could take a decade or longer to recover.

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