Workers pay for Government and speculators’ failed policies

national | worker & community struggles and protests | opinion/analysis Wednesday April 08, 2009 19:14 by Éanna Dowling eanna.dowling at gmail dot com

commentary on Ireland's emergency budget

Irish workers will bail out the bankers and the speculators following a decisive emergency budget. All workers will have reduced spending power as a result of tax increases while a new agency has been established to buy up “bad assets” with Government bonds. The income levy introduced in September has been doubled as has the health levy and minimum wage workers have been brought into the income tax system.

Take home pay will be reduced for all workers in May. The deficit between Government income and expenditure is massive due to the bursting of the property bubble, banking mismanagement and the policy of positioning the country as the most “open” economy in Europe. That policy ensured that Ireland would be the most vulnerable to fluctuations in the globalised economy. Government borrowing will be over 10% of national income this year, but the main source of income to fix the problem is the increase in direct personal taxation.

Social welfare impact
Social welfare rates remain as they were, but the scrapping of the traditional Christmas bonus for pensioners, people on disability, lone parents and the long term unemployed will mean that Christmas will be frugal. In the RAPID areas where the disadvantaged are clustered, the measure will have a major impact on the local economy as there will be less money for Christmas parties, drinks, decorations and gifts.

From April 29, under 20s signing on will only get half of the full adult rate. The measure will be implemented in time to catch school leavers who don’t get onto a further education course. Finance Minister Lenihan claimed the initiative was developed mindful of the disparity between social welfare rates North and South of the border. Northern Ireland social welfare rates are about £60 per week, compared to €200 in the Republic. But for citizens far from the border in Cork and Kerry, the comparisons with the North are largely irrelevant.

Rent supplement will also be reduced, but it is not clear yet by how much. This will have an impact on many social welfare recipients who haven’t yet been provided with adequate social housing by their local authority. Lenihan’s logic was that average rents are going down, therefore the State’s subsidy should also be reduced. But he is confusing two very separate parts of the rental market. Rents are not falling in the town centre flats where many long term rent allowance recipients are housed. In the satellite towns and suburbs, they’re plummeting.

A surfeit of housing was created in small town and rural Ireland when planning permission was granted by local Government on land rezoned by local councillors for developers to build 3 and 4 bedroom house commuter estates. Many of those estates are unfinished or half empty thereby reducing rents as the demand to live there has evaporated.

But the demand to live in city centres, in urban villages, or in the handful of available properties in a provincial town centre has remained relatively constant. Many rent allowance tenants are long term and may never be allocated social housing. The landlord is under less pressure to reduce rents than a speculator left with an empty expensive house that’s competing for scarce tenants with other property market investors. The bad news for Rent Allowance recipients is that they’ll be docked – and it’s up to them to negotiate with the landlord to see how much of the hit he’ll take.

New Government Agency will buy bad assets
The Government has introduced a scheme to buy land and buildings from speculators that can’t afford to pay their debts. A new agency has been created to buy the bad assets from the State guaranteed banks. The National Asset Management Agency will be run by the existing National Treasury Management Agency. It will negotiate bad asset value with the nominal owners of the asset and the banks, then buy the asset with 10 year Government Bonds, then seek to cash in the asset on the open market. It is unknowable how much this could ultimately cost the taxpayer, but the Minister for Finance, Brian Lenihan estimates the total book value of the bad assets to be €80 billion. This is a significant increase in his estimate of €10 billion in January. Labour Party finance spokesperson commented in the Dáil that those bad assets would include properties in Dubai, Bulgaria and London as Irish Banks had loaned millions to speculators for investment throughout the world.

Bad assets may well include financial products such as mortgages as well as the properties they were used to purchase. The taxpayer will now take the risk for repaying enormous loans to speculative developers from banks who generated new money under the fractional reserve banking system to provide them. This could see the tax adjustments announced in the April budget remaining in situ for the foreseeable future. A Government elected on a low tax strategy have, through their own misguided unsustainable development policies, created an unhappy workforce burdened with paying for the indulgent worship of the cult of growth.

The 5 year plan
Lenihan outlined his five year “multi annual consolidation plan” to reduce public spending and increase income tax revenue from workers. Whether this will stabilise an economy in freefall remains to be seen as unemployment at 370,000 is universally expected to rise. Further cuts in public spending will be announced over the next few weeks by individual departments. The Transport department has already announced a cut of €315 million in its budget. Further increases in taxation will be announced later in the year as the Taxation Commission reports, with the Green Party pushing hard for the introduction of a carbon tax.

The few positives so far to have emerged include a new early retirement scheme for public servants aged 50 or over, the start of the downsizing or the public sector; the introduction of a free 1 year pre school education programme for all, though it has yet to be announced how it will work; and the abolition of Ministerial pensions for sitting TDs.

Reaction has been mixed: “At least we have a plan,” said Eddie Hobbs on Prime Time. “It’s a poxy plan, but at least it is a plan.” The Labour Party’s Joan Burton said: “This is the budget from hell.” Economist David McWilliams said: “In Ireland, the government appears to be willing to saddle the person on the street with the bill for the bankers, and not even demand the heads of the guys who enriched themselves while bankrupting the country.”

As the impacts of the new levies reveal themselves in May’s pay packets, the Irish workers who chose to believe the myth of perpetual growth, find themselves with less disposable income to pay off their massive personal debts. Expect a decrease in consumer confidence, less spending, more job losses and the growth of discontent.

Éanna Dowling
April 8, 2009