Making McCarthy cuts may be just too hard a political sell

First out, ministers Eamon O Cuiv and Martin Cullen protested the harsh effects of the McCarthy report on their departments. Then, Tanaiste Mary Coughlan, evidently voicing the views of other cabinet colleagues, said that "many" of McCarthy's proposals for €5.3bn in public spending cuts "did not make sense". Health Minister Mary Harney, meanwhile, stuck to the spirit of the McCarthy report, warning of over €1bn savings in next year's health budget. Such political rumblings are all sure signs that in these key weeks ahead of the December budget that the political lobbying - inside and outside government - against which bits of the McCarthy report will be implemented has started in earnest. Looming above the hard discussions and special pleadings is the huge €4bn in spending cuts the Government says it needs if the multi-year budgetary sums it has agreed with the European Commission are not to unravel. In the next few weeks, Minister for Finance Brian Lenihan faces some big decisions. In the middle of July author Colm McCarthy, the UCD economist, bounded from one media interview to the other, explaining the work of the previous eight months. His panel of experts included the second secretary-general of the Department of Finance, Donal McNally, and the department's offices and resources were used in the drawing up the report. The McCarthy report can therefore be read as the Department of Finance's crisis strategy to respond to the €20bn gap between what the Government spends and the depleted revenues it raises from an economy in a slump. The reaction during the summer was fairly muted even though public sector unions did indeed warn of strikes if the report's recommendations on pay and staff reductions were implemented. McCarthy proposed a minimum of 17,300 public service jobs, or about five per cent of the 350,000 posts, should be axed and recommended cuts in every single government spending item. In welfare, health and education, the group recommended savings of more than €2.8bn, including five per cent cuts in all social welfare payments. It said child benefits could be reduced. It also proposed higher prescription, hospital and nursing home charges, staff cuts in primary, secondary and tertiary education and cuts to school bus services. A number of local government authorities could be merged, the report recommended. Funding for An Garda Siochana and reductions in staff and budgets for the courts system were also proposed. Cuts in aid to farmers, employment training schemes, road maintenance, grants to regional airports and tourism promotion were also recommended. In further signs that the hard choices will be made in the coming weeks, unions have been stepping up their warnings about strikes if the McCarthy cuts were implemented. However, the big flaw of the McCarthy report is the wide ranging 'menu' of cuts it proposes will make it more difficult to implement. The Government will presumably be wary of seeking cuts that generate more opposition than are justified by the savings. The lesson of the proposal last December to remove medical cards from the over-70s will likely have been learned. But re-reading the McCarthy report makes it difficult to see how the Government can implement the report without sparking widespread opposition. The scale and depth of the cuts run across every single spending programme, making it harder for the Government to find its €4bn. Paradoxically, as the backdrop of the global banking crisis eases, the Government will find it more difficult to sell cuts spread across all its budget lines. The McCarthy panel started its work at the height of the financial crisis. By early spring, it appeared that the Government could be cut off from sovereign debt markets. Here's what the McCarthy had to say about the potential funding crisis: "Ireland is now in a position where we need to borrow more to fund a larger budgetary deficit, while paying higher costs for this borrowing. This means that ever increasing proportions of our tax revenues will be needed to service the national debt. In 2009 over 11 per cent of estimated tax revenues will be used for this purpose, compared with a figure of about 4.5 per cent of tax revenues as recently as 2007. Aside entirely from Ireland's obligations as a eurozone member, to control the fiscal deficit, a persistent large gap between spending and revenue will rapidly build up a high debt burden, runs the risk of exposure to rising world interest rates and a re-run of the intractable and protracted public finance crisis of the 1980s." Since the summer, the Government could breathe a sigh of relief that the interest rates we had to pay to finance the deficit and to continue to fund spending fell back substantially. Ireland still has to pay among the highest rates in the European Union to borrow money to fund spending but the global crisis abroad has eased. Large cuts that can be made during a crisis may be more difficult to make when tension eases. Selling the McCarthy cuts could be more difficult task. The Government may yet defer making the big McCarthy cuts for another year, cutting more than it planned from capital projects to make up its €4bn savings target. Unfortunately, the required savings to plug the huge deficit will still be required to be made this time next year.