Leaks on budget cuts fall short of the €4bn target

The Government has said that it will cut €4bn to reduce or at least stop the annual deficit from going any higher, even as the European Commission extends its deadline to get the public finances in order. Last July, the Department of Finance received its so-called menu of proposed cuts amounting to €5.3bn compiled by Colm McCarthy. However, the latest leaks of the Government's budget intentions suggest that the government will either miss the €4bn target by up to €1bn or will achieve the planned cuts by making up the difference by scooping out a huge chunk of the €7.2bn it spends on the capital budget - building new roads and rail, maintaining local roads and building new schools. Capital spending, which was cut by one-fifth last year, was the one big area of spending not examined in detail by McCarthy. This, of course, did not stop McCarthy's team from warning that there should be "more scope for further scaling-back and reprioratisation of capital expenditure". My guess is that the political difficulties the Government faces in cutting big chunks off the public sector wage bill or unacceptably targeting the poorest by cutting all social and unemployment benefits will lead to it slashing spending on the capital budget by over €1.75bn. The sums do not add up any other way. It is proving to be more of a traditional budget than anyone would have guessed. Kite-flying by Government ministers testing the political temperature is showing the outlines of the areas where the €4bn cuts will fall. In successive weekends, the Government has hinted at threatened cuts only to judge the reaction of the newspapers and the daily radio chat shows. Two weeks ago, it appeared a running certainty that the budget cuts would extend to all child benefits payments. Commentators piled in to say that it was "inevitable" that the €2.5bn benefits, accounting for about 12 per cent of the €21bn social welfare spending, would be reduced severely. Government ministers revealed they were thinking of introducing three payment bands for child benefits but refused to say whether benefits to the lowest income families would be spared. Fergus Finlay of Barnardos said that he accepted that benefits to higher income families should be cut as there were "some recipients of child benefit at the moment who probably don't need it". In his July report, McCarthy of An Bord Snip recommended the Government save over €510m by paying families a standard €136 per month for each child in the household. By the last weekend, according to the latest leaks, the cuts in child benefit cuts would amount to over €250m, about half McCarthy's recommended target. McCarthy also recommended grading dole payments, specifically reducing the rate of the jobseekers' allowance for the unemployed aged between 20 to 24 years. By last weekend, the latest leaks from Government sources suggested that the reductions would indeed be implemented, but that State pensions would be untouched. The focus has shifted back to the €1.3bn savings the Government said in recent days it will make in 2010 from cutting the pay and numbers employed in the public sector. The McCarthy report in July has this to say on public sector pay: "Of the €19.8bn overall expenditure on exchequer pay and pensions, public service pay accounts for approximately €17.5bn in 2009. As regards rates of payment, the group notes that the pension-related contribution, introduced with effect from March 2009, will yield approximately €1.1bn in a full-year, equivalent to a reduction of 7.5 per cent on average in public service wages, although the reduction reaches a figure of 10.5 per cent for all income above €60,000. In the group's view, the Government will need to secure further savings in public service pay costs to achieve the required reductions in overall public expenditure, and in this context it will have to consider further reductions in rates of pay and allowances in addition to the numbers reductions proposed in this report." The McCarthy report went on: "There is also a case for instituting a new benchmarking process to address the pay of public servants generally, with a remit to look at international pay rates and not confine itself to domestic comparators, and with a mandate to recommend reductions where the facts warrant this." There is no doubt that public sector pay will be cut more in the coming years. My guess is that the Government will deliver fairly modest cuts in the public sector pay bill in next month's budget. As always, the capital spending and the jobs that depend on will be badly hit. It will be traditional budget, after all.