Ireland implemented its toughest Budget in decades a fortnight ago, as the Government continues to grapple with the historic economic decline of the past two years. Total expenditure cuts of 2.5% of GDP were made – focussed on public sector pay, social welfare rates and infrastructure spending. Including the cuts in public sector pay earlier in the year, the cumulative cut is now 10% for low paid public servants and 25% on the highest paid. Welfare rates were cut by an average of 4%, although pensions were spared.
The budget for public infrastructure spending was also cut. This was the only sub-sector of the construction industry that was showing any sign of strength, but in 2010 will face a decline in activity levels. Private commercial house building activity has come to a virtual standstill, with new commercial house commencements showing a 94% fall on 2006 levels, while activity in commercial property will also continue to weaken next year.
Outside of construction, there are signs that the economy has bottomed out and will start a gradual recovery over the course of 2010. Exports have withstood the sharp decline in global demand better than in most other developed countries and will benefit from improved cost competitiveness as Irish prices fall. At home, Irish consumer spending has started to show some stability, after the sharp falls seen around the turn of last year.
Undoubtedly, consumer demand has been helped by the stabilisation in the rate of unemployment at 12.5%. While in part this is due to the re-emergence of emigration, there are other signs of an improvement in labour market conditions. Income tax revenues have been stronger than forecast, while the number of vacancies notified to the state training authority rose.
GDP change in 2010 is likely to be around 0%, with the harsh budgetary measures dampening any growth impulse. Construction activity is expected to remain depressed, although improving global conditions should support solid export growth. While interest rates are also likely to start increasing in 2010, their effect won’t be felt until 2011.
In making these cuts, no punches were pulled. Public sector pay was reduced by between 5% and 8% for rank and file workers and by 15% for the highest paid public servants. These reductions are in addition to the levy on public sector pay implemented early in 2009, which reduced pay by an average of almost 7%. Going into 2009, public sector workers enjoyed a 25% premium on their private sector counterparts following excessive pay awards during the last decade, although this is now down to close to 10%.
Welfare recipients were also hit. The average reduction in entitlements for the unemployed and other categories of welfare recipients was over 4%, with only pensioners being exempted. Because of negative inflation this cut only represents a small cut in real terms of around 1%. The final area of cuts was in the budget for infrastructural investment, where spending was reduced by almost EUR1bn. While Ireland will still be spending a relatively large share of 4% of GDP on public capital programmes in 2010, this will be cut further to 3.4% in 2011.
The tax measures in the budget were broadly neutral. The revenue raised from a new carbon tax was used to fund cuts to other consumption taxes in an effort to stem the flow of cross-border shoppers to Northern Ireland, attracted by the weakness of sterling.
This budget represents a very credible step toward meeting the stated goal of reducing the General Government Deficit to below 3% of GDP in 2013. However, borrowing is still expected to be high in 2010 despite the cuts and Ireland remains susceptible to shifts in international sentiment, such as those caused by the deterioration in Greece’s fiscal position.
The budget for public infrastructure spending was also cut. This was the only sub-sector of the construction industry that was showing any sign of strength, but in 2010 will face a decline in activity levels. Private commercial house building activity has come to a virtual standstill, with new commercial house commencements showing a 94% fall on 2006 levels, while activity in commercial property will also continue to weaken next year.
Outside of construction, there are signs that the economy has bottomed out and will start a gradual recovery over the course of 2010. Exports have withstood the sharp decline in global demand better than in most other developed countries and will benefit from improved cost competitiveness as Irish prices fall. At home, Irish consumer spending has started to show some stability, after the sharp falls seen around the turn of last year.
Undoubtedly, consumer demand has been helped by the stabilisation in the rate of unemployment at 12.5%. While in part this is due to the re-emergence of emigration, there are other signs of an improvement in labour market conditions. Income tax revenues have been stronger than forecast, while the number of vacancies notified to the state training authority rose.
GDP change in 2010 is likely to be around 0%, with the harsh budgetary measures dampening any growth impulse. Construction activity is expected to remain depressed, although improving global conditions should support solid export growth. While interest rates are also likely to start increasing in 2010, their effect won’t be felt until 2011.
Harsh budget takes knife to Government spending
Ireland’s 2010 Budget, announced two weeks ago, represents a watershed in Ireland’s efforts to rectify its yawning Government deficit. Total expenditure cuts came to EUR4bn, or 2.5% of GDP. This figure was attained through sharp cuts in current spending (EUR3.1bn) and capital spending (EUR0.9bn). These cuts will reduce the tax take, so the overall withdrawal from the economy is expected to be EUR3.4bn, or 2.1% of GDP in 2010.In making these cuts, no punches were pulled. Public sector pay was reduced by between 5% and 8% for rank and file workers and by 15% for the highest paid public servants. These reductions are in addition to the levy on public sector pay implemented early in 2009, which reduced pay by an average of almost 7%. Going into 2009, public sector workers enjoyed a 25% premium on their private sector counterparts following excessive pay awards during the last decade, although this is now down to close to 10%.
Welfare recipients were also hit. The average reduction in entitlements for the unemployed and other categories of welfare recipients was over 4%, with only pensioners being exempted. Because of negative inflation this cut only represents a small cut in real terms of around 1%. The final area of cuts was in the budget for infrastructural investment, where spending was reduced by almost EUR1bn. While Ireland will still be spending a relatively large share of 4% of GDP on public capital programmes in 2010, this will be cut further to 3.4% in 2011.
The tax measures in the budget were broadly neutral. The revenue raised from a new carbon tax was used to fund cuts to other consumption taxes in an effort to stem the flow of cross-border shoppers to Northern Ireland, attracted by the weakness of sterling.
This budget represents a very credible step toward meeting the stated goal of reducing the General Government Deficit to below 3% of GDP in 2013. However, borrowing is still expected to be high in 2010 despite the cuts and Ireland remains susceptible to shifts in international sentiment, such as those caused by the deterioration in Greece’s fiscal position.
