Perceived unfairness could yet undo Lenihan's careful budget strategy

The undoing of Brian Lenihan's latest budget could all come down to how fair it is perceived to be. The measures certainly showed a good deal more thought and coherence. It is clear that the budget strategy was thought out by the Department of Finance officials many months earlier and, after the fiasco of the early budget in October 2008, it looks like officials decided to prepare the ground somewhat more intelligently. The department commissioned and staffed Colm McCarthy's An Bord Snip on public spending. It was something of a strategic master stroke that set an agenda before the summer by identifying huge cuts of €5.3bn. It made the €4bn reductions that Lenihan said he would need seem a blessed escape. Only the department's inexplicable failure mid-summer to explain and argue its case for the National Asset Management Agency (Nama) for a while threatened to topple its whole budgetary edifice. Then the finance minister turned his back - for reasons he never coherently explained - against raising income taxes across the board. The official explanation was that consumer confidence could not bear much more pain. Evidently the department, as the employer of 333,000 workers, had decided at an early stage that civil servants and public sector workers would bear the brunt of the pay cuts in budget 2010. The Government tried to put the best look on its latest budget sums but reading the supplementary documents makes clear that it is only the first of three annual budgets that it will have to sell hard to the public. The Minister for Finance attempted to put a ridiculous public relations spin on his budget, saying that because the Government had made such a good start in the last 14 months in imposing painful measures, that next year's budget and the one after that would not need to be as severe. The minister said that, instead of the €4bn in cuts and extra revenue that he would require, only €3bn reductions (or "adjustments", as the department would have it) and "only" €2bn in savings would be needed from current spending because €1bn in savings in capital spending had already been identified. It was as if a cut in capital spending - and the tens of thousands of jobs it creates - was not a cut at all. The discovery that the Government need only cut €3bn, not €4bn, in each of the forthcoming two budgets, has probably more to do with the time extension the European Commission gave Dublin to get its budget sums back in order. An additional year means slightly less money has to sucked out of the economy in any single year before 2014. However, the same amount of money still has to be extracted, albeit over a slightly longer period. The international audience looking on at the budget measures were the European Commission and what many commentators refer to as the 'international markets'. Translated, that means the individual overseas lenders, governments and banks from whom Ireland needs to borrow many billions of euro over the next few years. These lenders may not care that much about equity and fairness but what they do worry them is whether the Government will be able to deliver the cuts without major social upheaval this year and in the years that follow. It appears that international lenders remain sceptical of the task: Irish sovereign interest rates increased in the week of the budget, driving up the cost of servicing the national debt. In fairness, interest rates also increased because the risk premium (or probability that Ireland would fail to pay back its debts) rose because of the difficulties facing Dubai and Greece. But, despite our membership of the eurozone, the sovereign bond markets are still anxiously awaiting the additional banking bill taxpayers face when the banks write down the value of their distressed home loans and bad corporate lending. Perceived fairness of the budget measures for all parts of society will increasingly matter in the months and years to come. Unfortunately, the Government's own budget documents raise questions about whether groups have been fairly treated by the successive budget measures and levies over the past 14 months. According to the department's profiles, many households with children earning €50,000 have lost about 4.6 per cent of their income through higher taxes and lower child benefits since October 2008. Households with children earning €100,000 have lost disproportionately less, or about 7.8 per of their income. The public sector household earning €50,000 with two children over six have lost almost 12.75 per cent of its income in the last 14 months, while the same public sector household earning €100,000 has also suffered disproportionately, with a 18.5 per cent cut in its income. Public sector workers appear to be most incensed at last week's budget measure that cut the income of those earning €50,000 by six per cent, while a cut of only 7.5 per cent will apply to those earning €100,000. Perceived fairness or unfairness of budget measures will become increasingly important. After all, budgets in the past have unravelled over less.