Into The Bog

In a week when Greece and Spain both saw their credit ratings under attack (see article), the budget at least gave the government an opportunity to reassure international investors that Ireland, unlike some other EU countries, is serious about controlling its budget deficit and public-debt burden. Mr Lenihan has done this with the toughest budget in his country’s history. Public servants face pay cuts of 5-8% on salaries up to €125,000 ($190,000); higher earners (who will include the prime minister) will see their pay cut by 15% or more. Unemployment and welfare benefits have also been cut, though not pensions. Next year’s budget deficit, at around 11.6% of GDP, will be similar to this year’s.
The budget came against the background of a sharp contraction in economic activity, far greater than that experienced in other euro-area countries. GDP is projected to decline by 7.5% in 2009 and a further 1.3% in 2010. An unemployment rate of 12% this year is at least showing some signs of stabilising. But consumer confidence remains weak and households continue to save more and to spend less, thereby depressing tax revenues. Next year, almost half of all income earners will pay no tax. In an effort to widen the tax base, the government proposes to introduce a new property tax.
The budget will put the government into direct conflict with trade unions for the second time this year. The pension levy may have been accepted by the general public, but the unions still protested vociferously. In pre-budget talks, the government noted a hostile public reaction to the unions’ proposal for a temporary pay cut for public-sector workers and a promise of big public-sector reform. It chose a permanent pay cut instead.
These measures mark the end of two decades of social partnership, based on a consensus approach to pay bargaining between government, employers and unions. Whether this will usher in a long period of industrial conflict will become clearer in the coming weeks. Public-sector unions are already giving warning of a sustained campaign of strikes. But in these hard times they may not win much support from the Irish public.

The Economist