The 2009 Budget represents a welcome shift in Irish fiscal policy
Lenihan is probably right in saying 'we have turned the corner'
The 2009 Budget may signal a shift in Irish fiscal policy, but it will have to be followed by sustained appplication to the cause of fiscal recitiude if it is to avert the looming crisis in the public finances predicted by the debt clock. As it stands, the Budget measures are projected by the Department of Finance to produce a barely noticeable decline in Exchequer borrowing from 11.7 p.c. of GNP to 11.6 p.c. in 2010.
However, the key players in the economy (most importantly the electorate) know that this was the stuff that was needed - the beginnings of restraint on the oversized public sector, cuts in expenditure, and the restoration of order in a private enterprise economy. Even some trade union spokesmen acknowledged as much in their comments on the Budget.
While there are still major flaws in the Budget, it did get it right in respect to the big issues: it introduced money cuts in spending, including pay and welfare benefits in money terms - an unprecedented development that, as a 'first', removes a major uncertainty regarding the credit rating of Ireland Inc, given its position within the fixed exchange rate regime of the euro, - i.e. that such cuts in monetary terms would prove well nigh impossible. This headline example from Ireland could prove useful in a Euro-zone context, for other countries, such as Greece struggling to introduce Budget reforms in the face of escalating Budget deficits.
Also, it shifted the balance towards spending cuts, while acknowledging the primary role of enterprise in putting the economy back to work - the only solution available to a country facing high unemployment.
Among the flaws are the still high level of current expenditure, meaning that further spending haircuts will be necessary, this time involving a more comprehensive resort to the public expenditure reforms outlined in the McCarthy Report.
There were tax increases in the Budget, for example the €200,000 non doms tax for exiles, which will raise minimal revenue, and which is introduced as a political sop to left wing ideologues - but there were also tax decreases - a belated, but nevertheless welcome recognition of the revenue positive potential of appropriate tax rate reductions - e.g. in the VAT and excise areas.
Most Irish (Keynesian) economic commentators on the Budget, while recognising that a more correct fiscal balance has been achieved, have tended to underestimate the potentials for the economy to outperform the forecasts made by the Department of Finance for tax revenue next year. This is because they habitually underestimate the effects on confidence arising from the rational expectations of economic agents who understand that a Budget for stability is good for business. (Such a process resulted in a surprise upsurge in economic growth in 1987-1988 in Ireland after a expenditure-cutting Budget on foot of the recommendations of the first 'Bord Snip').
For similar reasons, the Budget deficit could come in below the 11.6 p.c forecast by the Department in 2010, as confidence factors unleashed by the Budget will lead to a revival of tax revenues. This will pave the way, and make easier, measures to bring the deficit down by several percentage points in 2011, and again in 2012, as will be needed.
However, the key players in the economy (most importantly the electorate) know that this was the stuff that was needed - the beginnings of restraint on the oversized public sector, cuts in expenditure, and the restoration of order in a private enterprise economy. Even some trade union spokesmen acknowledged as much in their comments on the Budget.
While there are still major flaws in the Budget, it did get it right in respect to the big issues: it introduced money cuts in spending, including pay and welfare benefits in money terms - an unprecedented development that, as a 'first', removes a major uncertainty regarding the credit rating of Ireland Inc, given its position within the fixed exchange rate regime of the euro, - i.e. that such cuts in monetary terms would prove well nigh impossible. This headline example from Ireland could prove useful in a Euro-zone context, for other countries, such as Greece struggling to introduce Budget reforms in the face of escalating Budget deficits.
Also, it shifted the balance towards spending cuts, while acknowledging the primary role of enterprise in putting the economy back to work - the only solution available to a country facing high unemployment.
Among the flaws are the still high level of current expenditure, meaning that further spending haircuts will be necessary, this time involving a more comprehensive resort to the public expenditure reforms outlined in the McCarthy Report.
There were tax increases in the Budget, for example the €200,000 non doms tax for exiles, which will raise minimal revenue, and which is introduced as a political sop to left wing ideologues - but there were also tax decreases - a belated, but nevertheless welcome recognition of the revenue positive potential of appropriate tax rate reductions - e.g. in the VAT and excise areas.
Most Irish (Keynesian) economic commentators on the Budget, while recognising that a more correct fiscal balance has been achieved, have tended to underestimate the potentials for the economy to outperform the forecasts made by the Department of Finance for tax revenue next year. This is because they habitually underestimate the effects on confidence arising from the rational expectations of economic agents who understand that a Budget for stability is good for business. (Such a process resulted in a surprise upsurge in economic growth in 1987-1988 in Ireland after a expenditure-cutting Budget on foot of the recommendations of the first 'Bord Snip').
For similar reasons, the Budget deficit could come in below the 11.6 p.c forecast by the Department in 2010, as confidence factors unleashed by the Budget will lead to a revival of tax revenues. This will pave the way, and make easier, measures to bring the deficit down by several percentage points in 2011, and again in 2012, as will be needed.