Wednesday, 16 November 2011

Is the government hiding more austerity?

Michael Taft: The Government may be hiding up to €800 in austerity measures in their recent Medium-Term Fiscal Statement (MTFS). I use the term ‘may’ because documents prepared by the Department of Finance can sometimes be frustrating exercises in ambiguity. However, on any logical reading of the document, it appears there is under-the-counter austerity which the Government is not admitting to. Indeed, there may be €800 million more spending cuts than is necessary to achieve the Government’s new €3.8 billion fiscal consolidation target.

The potential sleight-of-hand occurs in the category described variously as ‘Carry Forward’ or ‘Carry Over’ or ‘Additional Impact’. This refers to the amount of money – from a tax measure or a spending cut - that only comes on stream in the following year. Two examples will help clarify this:

Taxation: in Budget 2011, cutting personal tax credits was projected to raise €585 million. However, it will only raise €435 million in 2011; the remainder - €150 million – will not be realised until next year. This is because tax is collected in arrears. There’s nothing under-hand about this, it is part of the budgetary process.

Current Spending: similar to tax, there are some spending measures where the full ‘savings’ is not realised until the following year. For instance, in Budget 2011 the 4 percent cut in Student Support Scheme grant rates was projected to ‘save’ €51 million in a full year, but only €22 million in 2011; the remainder, €29 million, will be realised in 2012. Again, there is nothing unusual in this.

Accounting for this is pretty straight-forward and is done every year in the Summary of Budget measures. The Government simply states the amount of tax revenue or spending cut it will achieve in the year in question, and put the carry-forward amount into the following year. That gives us the total amount of ‘consolidation’ that takes place in any particular year.

This is where the Government may be hiding up to €1 billion in austerity measures. Let’s first look at current spending, stepping carefully through this statistical forest. Fianna Fail’s National Recovery Plan gives a fairly transparent accounting of the consolidation they planned.

In 2012, Fianna Fail planned to cut €1.3 billion. However, there is the ‘Additional Impact’, or carry forward from Budget 2011 amounting to €400 million. This gives a total of €1.7 billion in current spending cuts. This €400 million carry forward estimate is confirmed in Budget 2011, where the carry forward of all spending cut measures is more precisely projected at €457 million. But the point is that while the total current expenditure cuts come to €1.7 billion, only €1.3 billion is ‘new’ for 2012.

Now let’s turn to the current Government’s MTFS. Here the issue is not so straight-forward.

In the row entitled ‘Current’, the Government intends to cut €1.45 billion. That also seems straight-forward enough. However, there is no mention of a carry forward or ‘additional impact’ that was referred to in the National Recovery Plan and projected in Budget 2011.

So is the €1.45 billion in current spending cuts inclusive of the €400 million carry-forward from Budget 2011? If so, then the Government only intends to cut €1,045 million this year. However, if it does not include the carry forward, then the Government’s total current spending consolidation is actually €1.85 billion.

I suspect it is the latter, for the Government has used the carry-forward category for Tax measures as the table indicates. That it doesn’t use it for current spending suggests they will cut €1.45 this year and pocket the extra €400 million from last year, hoping that no one notices.

When we come to taxation, the sleight-of-hand becomes more obvious. As seen in the table above, the Government intends to raise €1 billion in 2012. There is a carry forward of €600 million from Budget 2011. This comes to a total of €1.6 billion tax consolidation for 2011. It seems straight-forward, right? Well, no. And the Government partially admits to the statistical trickery.

Footnote 5 in the final row beside the carry-forward of ‘0.6’ in the 2012 column reads:

‘The Universal Social Charge is also expected to deliver an additional €0.4 billion in revenues in 2012. While this is not part of the €3.8 billion consolidation package, it is captured in the budgetary projections.’

This is an incredible statement. Translated, it reads: ‘the €400 million carry forward in the Universal Social Charge has been included in the budget for 2012. But we’re not going to include it in this table.’

Why not? It is a carry-forward, the same as any other tax. You can see that in the Summary of 2011 Budget Measures where it was projected to be €435 million (Page B.6).

Even the EU Commission, in its 2nd quarterly review of the bail-out deal (Table on page 11 of the text), listed the total tax carry forward from 2011 at €1.1 billion. It saw fit to include the USC. But not the Government.

The reason why they did not include the USC in their table– and this is my speculation – is that it would raise the amount of total taxation consolidation to €2 billion, rather than €1.6 billion. And the optics of this would be bad. So to make the taxation measures look less than what they actually are, they just consigned part of the carry forward tax revenue to a footnote.

Here is my reconstruction of the Government’s consolidation package inclusive of all carry forwards:

The austerity package for 2012 appears to be €800 million more than what the Government is admitting to. If so, there are €800 million more cuts in current and capital spending than are actually needed, even to reach the Government’s new consolidation target of €3,800 million. €800 million less cuts is something to consider – more hospital services, more education services, and more capital investment (which means more jobs today and down the line). Is Labour aware that the Fine Gael Minister for Finance is trying to cut €800 million more than is necessary even by his own benchmark?

However, the Government may dispute all this. If so, then it should clarify the situation. They only have to answer two questions:

• Do the current spending cuts for 2012 include the spending cuts carry forward of €400 million from Budget 2011?
• How much is the total tax carry forward (including the USC) from 2011?

Answering these questions would settle the matter raised here. However, if they choose to obfuscate and ignore then it will be a sign that the Government is not committed to an open and transparent budgetary process.

And when people ask, why does it feel worse than what we were told, the answer will be simple: because they weren’t told the whole truth of the matter.

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