The country is ready for its medicine, it just needs a government that can administer the dose, writes Alan Ruddock

OUT of the chaos of the past week comes next Wednesday’s Budget - and the omens could hardly be less propitious.

The Government is in disarray, incapable of leadership or unity and dangerously disconnected from the people. The permanent government of the Civil Service is at war with itself as the Department of Finance and the Department of the Taoiseach pull policy in opposite directions. The trade unions, led to the altar once again by Brian Cowen, the Taoiseach, have been unceremoniously jilted and will, once they recover from their shock, start agitating for strikes.

From this mess Brian Lenihan, the Minister for Finance, is expected to produce a Budget that starts the four-year programme of economic recovery. He is meant to find savings of EUR4bn, knowing that each euro saved in government spending will cause pain somewhere and knowing, too, that he cannot rely on his Cabinet colleagues, his coalition partners, his own backbenchers or even his own Taoiseach to offer full-blooded, unequivocal support.

It is a massive challenge: Lenihan must convince the international markets that Ireland is serious about solving its problems and he cannot hope to fool them. His Government has promised the European Commission that it will deliver permanent solutions for our collapsed economy and that is what he must do. ‘Credibility demands that he start by cutting from the top’

There is no room for fudge or deception or clever-clogs semantics. Spending must be cut, and cut with immediate effect. He cannot shy away from cutting public sector pay or cutting social welfare simply because they already cost far more than his Government will raise in taxes this year.

He knows that this is not a temporary problem. Ireland’s economic collapse has created a structural deficit - part of the economy has died and will not be reborn. Even when we start to emerge from recession, tax revenues will not recover to the bubble-inflated levels of the middle of the decade. The cost of the public service has to be rebased to the new, smaller economy that will emerge and the level of social welfare payments will have to reflect the new economic realities of wage and price deflation.

But Lenihan’s most immediate task is to re-establish at least a modicum of moral authority for a Government that has none. Last week’s events were not a once-off: Cowen’s Government has been stumbling from crisis to crisis since he became Taoiseach more than 18 months ago.

From the ignominy of the Lisbon Treaty defeat through that first summer of economic collapse and on though the banking crisis and deepening recession, Cowen has stumbled and the public’s confidence in him has collapsed. Now even his most loyal supporters must be infused with doubt as he thrashes back and forth from tough guy to facilitator, from union friend to union foe.

His serial failures, when layered on top of Bertie Ahern’s years of amoral fiscal rule, have corroded faith in the entire political system. Ahern started the rot, but Cowen has compounded it.

Moral authority will not return at a stroke, but the process of rehabilitation can start with Lenihan’s first sentences on Wednesday afternoon. He must start by announcing deep pay cuts for all politicians and senior civil servants: a minimum 15 per cent for TDs, 25 per cent for Cabinet ministers and senators. He must follow that with a culling of government departments and a reduction in the size of government: three departments can be axed, with their functions redeployed or simply abandoned. There is no more need for a Department of the Taoiseach, a creature of social partnership that now exists in opposition to the Department of Finance.

There is no need, either, for the long-winded departments of Arts, Sports and Tourism or Community, Rural and Gaeltacht Affairs, or for their ministers.

The saving will not be huge, relative to the scale of the savings that must be found, but Lenihan needs to show that the cuts start at the top.

Once he has cleared the air on government reform, Lenihan can announce the cuts that the trade unions were so desperate to avoid. Public sector pay must fall by between 5 and 7 per cent, though the actual cuts can be varied across the different pay grades. The cuts must carry through to the pensions of retired public servants.

Social welfare rates also have to fall by 5 per cent - a sharp fall, but cushioned by the even sharper fall in consumer prices - and child benefit should be taxed or simply cut. There is room, too, to cut at least EUR1bn from capital spending - a cut that needs to be accompanied by reform of the entire capital spending project, which needs rigorous, independent assessment.

Cuts in public sector pay will deliver Lenihan savings in this Budget, but he must also start the process of finding savings in each of the next four years and that is why reform is so critical. The Government needs to appoint a minister for public sector reform, charged with the responsibility for managing and delivering real, measurable change. The unions must be forced to realise that there is no choice but to deliver reform.

On tax, Lenihan has little room for manoeuvre. The real problem with the tax system lies at the bottom and not at the top - next year more than 50 per cent of workers will not pay income tax. The system needs to be overhauled, but it cannot be done immediately and a further increase in income taxes for those who already pay them is not a sensible option for this Budget. It seems inevitable that a new carbon tax will be imposed, but that should be the only new tax this year.

The combination of public sector pay cuts, social welfare cuts, carbon tax receipts and capital spending cuts should come close to delivering the required EUR4bn, but that is just the start.

For the moment, we are running to stand still, with the cost of our debt repayments rising to almost EUR5bn next year. The more we borrow, the higher those debt costs will rise, forcing ever deeper cuts in spending. It is a vicious spiral of decline that has to be broken and that will require deep structural change.

Privatisation, long resisted, has to be rolled out over the next four years with the twin objectives of raising cash and boosting competitiveness in the economy. The professions, too, have to be forced to reduce their prices as part of a concerted drive to reduce costs across the economy. Ireland cannot devalue its currency, so the only way to recover lost competitiveness is to slash costs.

None of this will be pleasant. The private sector of the economy has already suffered a savaging in the recession: businesses have collapsed, tens of thousands of jobs have been lost, and wages have been cut.

That pain will continue for many years, with more jobs lost next year and further wage cuts on the way. The public sector has felt some of the pain, already taking a pay cut disguised as a pension contribution this year, but its permanent employees do not have to fear for their jobs and, by extension, for their homes. Lenihan’s Budget has to be a credible first step on the way to recovery: credibility demands that he start by cutting from the top and reforming the business of government.

If he cannot do that, then last week gave us a glimpse of the miserable future that awaits. Weakness leads to chaos, and chaos to disaster. The choice for Lenihan and Cowen should be abundantly clear. They have to recognise that the people understand the economic crisis far more clearly than they do, because it is the people who are living through it and dealing with it every day while politicians and union leaders inhabit a sheltered world.

If Lenihan and Cowen do not have the political and moral strength to deliver a Budget that sets the country on course for recovery, regardless of the outrage of the union movement, then they should step down and call a General Election. The country is ready for its medicine: it just needs a government that can administer the dose.

Sunday Independent
06 Nollaig 2009

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