Friday, November 12, 2010

Ireland's Budget Cuts: A Case Study on the rewards of Austerity

For those who don't know, austerity is "a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided. Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debt".

In the United States, our government is now beginning to understand the importance of Austerity and how its the responsible thing to do when in hard economic times.  Therefore, I though I'd review all the good things that happened to Ireland as it pursued its own austerity.

In late 2008, as the world financial markets were crashing and burning, Ireland, like other nations, saw tax revenues dip, money disappear overnight, and the economy quickly contract.  As you can imagine it caused huge budget deficits and it's debt started rising.  Unlike most other nations in the EU, it did the responsible thing and declared that Ireland would not take part in EU stimulus plans.  Ireland continue to reap the rewards of it's responsible actions.

September, 2008.  Ireland cuts spending by another 1.5% or a total of 4% less from the year before.
With September tax returns expected to be very bad and the economic climate rapidly deteriorating, a further 1.5% reduction in 2009 spending is now up for debate. This would bring planned cutbacks in current expenditure for next year to more than €2bn.

From May 1, a 2 percent “income levy”—effectively a pay cut—is to be imposed on all those earning between €15,028 and €75, 036. This doubles a levy first introduced last October and reduces the tax threshold to incorporate large numbers of low paid workers. Those on higher incomes will be levied at 4 percent and 9 percent of their income.
A health levy is also to be increased to 5 percent. This, as with other levies, is to be taken directly from the pay packets of workers whose tax payments are collected by their employers. This will be added to the pension “levy” also extracted from public sector workers in February.
The government also announced there will be no Christmas welfare payment for social security claimants in 2009. More damningly, childcare allowances for pre-school children are to be halved immediately and abolished by the end of 2009. Child benefit, currently paid to all parents, is to be means tested.
Payments to unemployed workers under 20 are also to be halved and rent support payments reduced, while new punitive measures will be introduced against welfare claimants. Mortgage interest relief will now only apply to the first seven years of its commencement.

December, 2009.  More drastic budget cuts are announced.  This time an additional 4 billion euros were being cut out of their budget.  All the cuts came out of wage cuts on public workers, reduced benefits for the unemployed, other reduced social welfare programs, and less spending on infrastructure
Public sector workers bore the brunt of cutbacks in Lenihan’s Budget with €1 billion in pay cuts ranging from 5 per cent for those on average pay to 15 per cent for those at senior level.
The rest of the €4 billion in savings will come from a €760 million reduction in the social welfare, a €980 million cut in day-to-day spending programmes and €960 million in savings on capital investment projects.
Cuts to Child Benefit will see a €16 euro per month reduction with the lower and higher rates now €150 and €187 per month respectively. Families on social welfare will be compensated with an increase of €3.80 a week in qualified child allowance.

At the same time, unlike previous budgets, taxes were heroically kept the same or lower.
VAT will be cut by half a percentage point from January for 12 months, while the corporation tax rate will not change from 12.5 per cent.

In February 2010, a levy(tax) was placed on the generous pension plans of government workers to save the government even more money.
In March 2010 , public sector wages were cut again, despite freak out from the greedy public sector unions.
Tax revenues have collapsed, the government has run out of money, we can't afford to pay state workers as much as they have been getting.
In fact tax revenues here have now fallen to the 2002 level. But since then, the payroll for state workers has increased by 35%.
So far the government has cut them back by an average of 12% over two budgets. But the state workers won't accept it.

By April 2010, Ireland's bold moves were rewarded by the financial industry, praised by the EU Central Bankers, and declared a model for Greece.
As a result, the country's government and taxpayers have been rewarded. The "spread" the bond markets charge to hold Irish 10-year debt over the German "bund" equivalent is now 139 basis points, less than half as wide as this time last year. The Greek spread over the bund, meanwhile, is 316 basis points – more than twice as high as that of the Irish – with Athens now paying far, far more than Dublin to service government debt.
"Greece has a role model and that role model is Ireland," said Jean-Claude Trichet last week, the European Central Bank president singling out the Emerald Isle for praise. "Ireland had extremely difficult problems and took them very seriously – and that's now been recognised by all."

Despite all these spending cuts and increased taxes on the public sector employees and middle class, Ireland still found itself facing another deep budget hole in October 2010.
DEEP welfare cuts loomed last night as ministers began a marathon session thrashing out how to bridge a €5 billion black hole in the budget.
A property tax and specific projects like the Dublin Metro North line were under discussion, as was cutting welfare which is set to take a hit of some €2bn. The Greens are keen to save Metro north and some ministers fear cutting the capital building programme too far will damage the economy in the medium term.
Education is also expected to be a big loser.

Last week, the outcome of the cuts were announced to be another 6 billion Euros cut from spending.
Irish Finance Minister Brian Lenihan plans to slash the budget deficit by 6 billion euros (US$8.5-billion) in 2011 as he fights to save the nation's economic independence.

How did the financial markets respond to these even more drastic budget cuts?  It rewarded them with higher interest rates.
Brian Lenihan, Ireland's Finance Minister, described the country's borrowing problems as "very serious", as the yields on its bonds hit yet another all-time high. The yield on 10-year bonds peaked at 9.26 per cent yesterday, almost four times the yield that is demanded by investors in equivalent German bonds.

The ultimate outcome of 2 years of fiscal austerity?
Senior officials in Ireland and the European Union yesterday moved closer than ever to conceding that the indebted country may now have no choice but to seek a bail-out.
Queue the Trombone:

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