Yesterday's budget was the most severe we have ever seen, but it did not sound like it, because in his budget speech, the Minister managed to avoid announcing most of the bad news by occasionally referring to the details in the accompanying budget documentation — a victory for tone over content. It is, therefore, a budget that will take some time to sink in. The Taoiseach gives the impression that the Government is protecting working people from tax increases and suggests that the Labour Party would tax them even more. Let us see what working people will say and how they will feel when they see their first pay packets in the new year. They will then realise the full combined impact of the reductions in tax credits and in the standard band, the loss of rent relief and the measures that will oblige working mothers to pay for benefit in kind for employer provided child care.
The budget may have passed in the Dáil last night, but its impact will only grow with each passing week in the new year. This budget is the itemised bill for the utter failure of Fianna Fáil's economic mismanagement. It sets out who pays for the abject failures of a succession of Fianna Fáil Ministers for Finance and years of complete incompetence.
As usual, people on low and middle incomes will have to pay. Pensioners on modest incomes will pay when the age exemption is cut and passport fees are applied. A pensioner couple on €40,000 will face €2,000 in additional taxes. Families with children will pay when child benefit is cut for another year, bringing the total cut for a family with three children over two years to €88 per month, in addition to the loss of the early childhood payment. Tax credits are being cut by €360 for each earner in the household and new fees are being applied to school transport. Young people looking for work or training will pay when their jobs seekers allowance is cut, a €200 fee is applied to further education courses and third level fees go up again. The people who have lost their jobs will pay when welfare is cut by €8 per week on top of the €8 cut last year. There is no compensation for the loss of child benefit. The low-paid worker will pay when the minimum wage is cut and income levies reach down to low levels of earnings.
Who will not pay? The highest earners pay more PRSI but are compensated by the cut in the top rate of levies. The 7% universal charge is replacing a combined 11% health contribution and levy. The high income earners in property schemes do not pay, or at least not yet, because their tax breaks are to be phased out gently rather than abolished. The tax exiles will not pay. We are still waiting for them to fork out a single cent from the measures introduced in last year's budget. In times gone by, we used to talk about the old reliables of excise duties on beer and cigarettes. Today, the old reliables are the tax breaks that Fianna Fáil continue to defend for the vested interests.
This budget is based on a strategy that has already failed. It has been constructed more on injured pride than on logic and more on ideology than on common sense. It is a budget based not on sound economics but on bad politics and failed diplomacy. It was not written in the national interest but as part of negotiations with the European Union and the IMF. It is part of a bad deal achieved for Ireland by Fianna Fáil in an attempt to write not just this budget but the next four budgets and to tie the hands of the next Government to its failed strategies. Labour will not be bound by its failures, however.
Let us be clear as to why the Government has brought in a budget that will take €6 billion, or almost 4.7% of GNP, out of the economy in a single year. The single most important decision that brought us to this budget is the blanket bank guarantee. That decision bound the Irish taxpayer to the losses of the banks incurred as a result of a property boom stoked by Fianna Fáil at every opportunity and its utter failure to regulate the banks. The blanket guarantee fundamentally undermined the creditworthiness of the State and led to a catastrophic loss of confidence in Irish bonds. That was the key decision from which there was no return.
It took a hard neck for the Minister for Finance to pretend yesterday that the need to seek help from the IMF only arose in the latter half of 2010. Listening to his speech, one would almost believe that the Irish economy met with an unfortunate accident during the summer holidays. We are here today as the direct result of the blanket guarantee and a series of profound errors that occurred prior to it and afterwards. Over the two years that followed the blanket guarantee, Fianna Fáil failed to get a grip of the banking crisis. NAMA, the strategy that was to save us, was always a getaway car and had the effect of crystallising losses in the banking system for all the world to see. Fianna Fáil constantly over-promised to the market but it under delivered. In doing so it fundamentally undermined confidence in this country and its creditworthiness.
Just as the game was up and bond yields were rising, a last ditch attempt was made to convince investors that they should lend to the State. Budget 2011, we were told, would make budget adjustments of €6 billion. This number was supposed to sufficiently impress the markets that they would agree to lend us money at reasonable rates again but nobody bought the story. Markets shied away because they could see the risk to growth of an adjustment of that size. The ECB's patience came to an end and Ireland was forced to go cap in hand to the IMF and the European Union for a loan. That is the basis for the €6 billion figure. It is a figure that was supposed to convince the markets but it failed to do so. It is a figure that was supposed to get the deficit in Ireland below 10% of GDP because the Minister insisted 10% was the magic number for the markets. Ireland, of course, is no longer in the market but having conceded the €6 billion figure to the European commission, Fianna Fáil now believes it cannot back away from it.
In fact, the analysis presented by the Department of Finance to the Labour Party was clearly intended to show that an adjustment of more than €4.5 billion would be self-defeating because it would not reduce the overall quantum of adjustment needed to get the deficit down to 3% by 2014. While the Commission continues to argue for the €6 billion adjustment, its own economic forecast shows a growth rate of half the Government's projected growth rate and a deficit that falls short of the so-called magic number of less than 10%. The logic for €6 billion has evaporated. It must now be asked who the €6 billion is supposed to impress. It is interesting to compare the economic forecast of the Government with that of the Commission. The Commission forecasts growth of 0.9% in GDP because it believes that exports will expand by4.5%, imports will remain muted and domestic demand, that is, consumption and investment will fall by 3.2%. The Commission predicts that consumption, which is worth about 50% of GDP and is jobs intensive, will fall by nearly 2%. The Government, however, expect exports to grow by 4.9% and that consumption will remain static in volume terms. Even though the Commission wants to stick to the €6 billion figure, it is not prepared to endorse the Government's forecast for the impact of a €6 billion adjustment on the economy.
The truth is that nobody knows how the economy will perform next year. Macro-economic forecasting is at best a form of educated guess work. Like opinion polls, macroeconomic forecasts are estimates which are subject to a margin of error, although economists rarely speak of them in that way. One can of course construct a forecast that indicates the economy will grow by 1.7% next year after €6 billion is removed from it but this comes with risks attached on the downside.
There is a lot we do not know about how the economy will perform next year. We are in uncharted waters. Ireland has suffered recessions in the past but none like this. Ireland has had a debt crisis before but it was not coupled with a banking crisis and an international recession. With the banking sector deleveraging and consumers paying off debts and adding to savings, there is every reason to be concerned about domestic demand next year.
In that context of uncertainty and downside risks, €6 billion is the wrong judgment on the scale of adjustment. We have been told in the four year plan that confidence is the key. What Paul Krugman calls the "confidence fairy" is going to make everything better if we take enough medicine. Confidence is important and it needs to be restored but the non-Keynesian confidence effects are speculative and unpredictable while the normal Keynesian effects of taking that much money out of the economy are far more mechanical and obvious. Equally, what should have been learned from this mess — but was not — is that restoring confidence is as much about restoring growth as it is about headline figures on deficit reduction. In the end, this is a question of judging risk and the risks of this adjustment are too high.
This is not an academic exercise. Ireland is not a laboratory for economists who want to conduct interesting experiments and write conference papers afterwards. We are speaking about people's jobs, their livelihoods and their homes, and whether their children will get jobs in this country or their grandchildren will grow up here. One does not take risks in those areas. One does not take risks with people's homes because one cannot own up to having made mistakes, with people's jobs because one cannot stand up to the Commission, or with the life chances of thousands of young people because one is part of a cosy ideological consensus that deep down believes austerity is good. It is not. It is sometimes necessary, but it has real consequences for real people in real life.
That is why Labour has proposed to keep the adjustment to €4.5 billion. It is still a demanding figure, but it leaves some room for growth and employment in 2011. It leaves some room for the economy to show growth, and for the Irish people to feel that we do actually have a prospect of turning the corner.
Labour stood alone in this House in opposing the blanket guarantee. We were right. Labour opposed NAMA. We were right. We are right in opposing this €6 billion adjustment, because it is not in the national interest, and because it is simply too dangerous.
The sad reality is that this budget is constructed on exactly the same kind of conservative consensus that got us into this mess in the first place and that says the market must always be free to do what it likes and that Government should get out of the way. Let us be clear too. The conservative consensus has no strategy for growth. This budget has no growth strategy, and it shows a vacuum in economic thinking about how an economy like Ireland can grow in the years to come.
Ireland is a small, open and flexible economy that has a proven capacity to trade successfully in world markets and, in doing so, to provide high and stable living standards for our people. To succeed in that objective, the role of Government is not marginal. It is critical, not in the sense of directing individual decisions about investment and production, but in the modern sense of supporting a network of institutions that support and nurture enterprise, and support and nurture people.
If this crisis has taught us anything, it is that failures of regulation can be catastrophic for all of us. It has also reminded us of how much we depend on each other. What we are living through is the first global crisis in global capitalism. We will get out of it, but it won't be the last recession. What matters for growth, and what matters for securing the living standards of our people, is that we have a growth model that combines both opportunity and security.
The conservative consensus just doesn't get that. They persist in the notion that social protection is purely a cost, that when you want the poor to do something you take something off them but when you want the rich to do something you give them more. What does it say about the Irish as a people, and what does it say to people who are asked to contribute to the social security system in the future, that as soon as trouble comes, rather than rally round to protect each other, we will mark out welfare as the target for cuts? It is a folly, and a short-sighted one at that.
The conservative consensus continues to insist that there is some kind of macroeconomic up-side in basing adjustment on cuts, rather than revenue raising. It is a political argument dressed up as economics. It is an argument that utterly fails to understand the medium-term needs of a small open economy, or the need for adjustment to be economically, socially and politically sustainable.
The elements of a growth strategy for an economy such as Ireland are not complicated in theory. The problem is that they take years to build up and can be quickly eroded. The future of our economy depends on having a set of interlocking economic policies that promote the following: competitiveness in the short run and knowledge based productivity growth in the long run; a strategy for investment in infrastructure, in people and in knowledge; an enterprise strategy that plays to our natural and accumulated comparative advantages; a labour market strategy that fits the skills of our people to the needs of the economy and of society; a functioning banking system that provides credit and supports entrepreneurs; and stability in the public finances and fair taxation.
Throughout this crisis, we have seen an obsession in Government with the banking system and the fiscal crisis, and no attention being paid in either the short term or the longer term to economic growth. We have had a lot of glossy guff about the smart economy, when what we actually need is a coherent jobs strategy that will translate into knowledge based productivity growth in all sectors.
There is no strategy in this budget, or in the four year plan, that meets these needs. Competitiveness is reduced to a low wage strategy focused on a cut in the national minimum wage. The strategy for investment is an announcement about the pensions reserve fund being prepared to finance public private partnerships, and is clearly not intended ever to be carried through. Enterprise strategy is about more tax breaks. The budget contains nothing on credit for small business and there is no labour market strategy worthy of that name.
What the conservative cheerleaders do not understand, or do not want to understand, is that this is a small island that cannot afford the social division they seek to promote. We cannot afford to portion off a sector of our society and say they do not matter. If we are to succeed as a people, we must harness the talents of all of our people. It is not just morally right, but economically necessary that no child is left behind.
So, why is it that the four year plan has imposed a cut in the educational psychological service? How can any Minister come into this House and talk about the smart economy, when the OECD tells us that the literacy standards of 15 year olds have fallen from ranking fifth out of 61 countries, to trailing in at 17th. In maths and science, Irish 15 year olds have fallen from 17th to 26th place. According to the same report, one in five 15 year olds does not have the maths or reading skills to participate fully in society or in future learning, yet this Fianna Fáil Government plans to take 1,200 teaching posts out of the system between now and 2014. The majority of these relate to disadvantaged children, such as Traveller children, newcomer children and students doing a vocational leaving certificate. On top of this, the 150 extra teachers the Green Party claimed as a victory in their renewed programme for Government last year are to be shelved.
As a country, we like to tell ourselves that we have a great education system, and we do. But there are holes in it, that swallow up the life chances and the potential of too many children. You cannot build a smart economy in a society where children cannot read, nor can you build a smart economy by placing further obstacles in the way of young people who already struggle to finish school or to go on to further education. We cannot have obstacles such as cutting the budget for programmes to prevent early school leaving by 5%; cutting the student grant, and raising the student registration charge by a further €500; or placing a €200 charge on a post-leaving certificate course. This charge is like slapping a €200 toll on a pathway to further education that is used disproportionately by students who need a second chance. It is a false economy, that will discourage people from participating in further education.
As ever, what this Fianna Fáil-Green Government takes from the education budget, families will have to reach into their pockets to replace. They must find €50 per primary school child just for getting the school bus, and €350 per secondary school child. There will be a cut in the day-to-day running costs of schools of €10 per child. In an average-sized school, that is another €2,000 shortfall parents are going to be asked to make up. Investment in education is not a drain on the Exchequer; it is an investment in our collective future.
This budget is based on a notion that somehow, public expenditure in all its forms is the problem. Labour says that we must have reform of public spending. Labour says that we must have reform of how public expenditure is managed, but we also need to have a view of why we are spending money in the first place. Our view is that public services — reformed and well managed — are a vital part of our strategy for economic recovery in delivering on the strategic imperatives I have outlined and in providing the social glue that will keep us together as a people. That is why, rather than lurching from budget to budget, and from one crude set of cuts to the next, we need a comprehensive spending review. Current spending does need to come down, but it needs to come down on the basis of a coherent multi-annual plan, that has buy-in across Government.
In my speech to the House some weeks ago, I set a target of achieving at least a 3% reduction in non-social welfare spending each year for three years. We do not need a set of ad hoc cuts served up by a hired consultant, but a considered view of where expenditure matters, and where it is less important. The approach favoured by Labour is a comprehensive spending review, based on the Canadian model, where the goals and means of delivering each spending programme are reconsidered.
The review should be based on the following objectives: prioritising education, as the link to our future; maintaining front line public services while reducing the cost base, particularly in the health service; maximising savings through efficiency and reform; and increasing public sector productivity, by delivering the same or better services with fewer staff.
Labour has said before that it is an absolute necessity that we achieve savings through reform, including the process of reducing numbers in the public service. After months of asking the Government for figures, the four year plan finally gives some details of what can be achieved. The target reduction in the pay bill of €1.2 billion is not, in my view, sufficiently ambitious. We need to achieve at least €1.4 billion in savings in the period 2011 to 2013, including a reduction in numbers of some 15,000 to 20,000, through a combination of natural wastage and voluntary redundancies.
The Labour Party has also accepted that Ireland can no longer afford a capital programme that is greatly in excess of the European norm. However, in bringing down the level of capital spending, we need to promote alternatives to the traditional Exchequer support for capital projects through the establishment of a strategic investment bank. The proposal in the budget for greater involvement by the National Pensions Reserve Fund is the same empty promise that has been made year after year.
Yesterday, the House was treated to another display of the kind of falsehoods that Fianna Fáil likes to peddle, especially when there is an election in the offing. The Taoiseach tried to tell us that Labour's tax proposals would hit hard-working families harder than Fianna Fáil. He tried again today by trying to invent tax proposals which the Labour Party never made and then attacking those proposals. Labour's tax proposals were largely centred on eliminating tax expenditures. How many average hard working families have investment in property-based tax schemes that we said should be abolished? How many hard-working families have invested in car parks or hotels? How many hard-working families have huge pension pots, such as the ones we said should have limits applied for the purposes of tax relief? Yet, the Taoiseach decided to roll every proposal Labour made into one and to claim that ordinary families would be worse-off as a result. Clearly, we are going to be treated to the same old Fianna Fáil distortions for the entire election campaign.
In respect of taxation, a number of measures in the budget are in line with Labour Party priorities. For years, Fianna Fáil scoffed at the idea that there was any money to be found in reducing tax expenditures. Now, it would appear, it has discovered that this was wrong. They have made some modest changes that are welcome, but, once again, the poor must pay now while the better-off are given more time. It is necessary to curtail tax relief for pensions, although Labour has a strategy that would be fairer and would retain maximum incentive for people to save for their pensions on an ongoing basis. While it is reasonable to have some phasing-in of change in this area, the proposal in the four year plan to cut tax relief for pensions over four years makes no sense. All it is doing is encouraging people to take more money out of the economy in 2011 and 2012, rather than just getting on with needed reform.
In last year's budget, the Government signalled its intention to introduce a universal social charge and the idea featured again in the four year plan as a medium-term objective. There is merit in this idea, since it provides for the simplification of a complex tax structure. However, it must be pointed out that the original idea of the universal social charge was to include PRSI as well as the income levy and the health contribution and to deal with the associated entitlement issues. In the recent ESRI study, the benchmark figure of a 7.5% charge was based on a revenue-neutral change, including PRSI. It was in this context that Labour's proposal for a third rate of tax of 48% was framed, which would have meant a maximum income tax rate of 55%. This detailed work, however, has not been done and PRSI has been excluded from the 7% universal social charge, while the PRSI ceiling has been abolished. This significantly changes the context for future reform.
The Minister for Finance, in his speech to the House yesterday, wanted to re-write history before he packs up his boxes for the new year. I am afraid it is too late for that. History will judge Fianna Fáil for its destruction of the good economy it inherited. We have heard much today about the future from the Taoiseach. The Labour Party believes that we will only solve our economic crisis if we pull together, if we provide a floor of social protection, if people can be sure there is a reasonable health service, if we protect the family home and if we keep our eyes fixed on the future and on a better life for our children. This budget has no such strategy. Once again, the future is put on hold as children are made to pay for the mistakes of the Government. Labour passionately believes that as a country, our best days are still ahead of us. We believe that as a people, we can do a lot better. Labour believes we can restore confidence, build enterprise, expand trade, train and educate our people and create a stable and prosperous future. We can meet the aspiration that is deeply ingrained in the Irish people — that the future for our children will be better than today. This budget is the last act from the worst Government in the history of the State. The next Government will have hard decisions to make, but from here on, at least we can begin to build the future.