THE IRISH GOVERNMENT'S APRIL BUDGET: BEGINNING OF

C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000146

SIPDIS

TREASURY FOR ATUKORALA

E.O. 12958: DECL: 04/06/2019
TAGS: ECON EFIN PREL EI
SUBJECT: THE IRISH GOVERNMENT'S APRIL BUDGET: BEGINNING OF
A LONG JOURNEY

REF: DUBLIN 130

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Classified By: Pol/Econ Section Chief Ted Pierce. Reasons 1.4(b/d).


1. (C) Summary: On April 7 the Irish government will release
a new budget aimed at fixing the hole in government finances
and in its reputation. Even with the new measures, the
government's 2009 fiscal deficit will come in above the 9.5
percent that it forecast earlier in the year. Most
economists recommend that the government focus on spending
cuts for fear that tax increases may choke off any hope of
near-term economic recovery. Such a focus risks angering a
sizable minority of the electorate who are now dependent on
social welfare payments. This budget is the first step
toward putting Ireland's economic house in order and,
depending on its harshness, is likely to cause political
problems for the government. End Summary.

Time For The First Step
--------------


2. (C) With the unveiling of new budget measures on April 7
the Fianna Fail-led government hopes to begin rebuilding
Ireland's image as a predictable, stable place to do business
and, at the same time, show the Irish electorate that it has
the wherewithal to lead Ireland out of the current economic
crisis. The media, the political cognoscenti, and,
increasingly, the "man on the street" have complained about
the government's piece-meal, equivocating approach to
tackling the crisis over the past nine months. In order to
do this, the government looks set to enact measures that will
cut the government's budget deficit by several billion
dollars. Nevertheless, even with this action, the 2009
deficit looks likely to reach double digits as a percentage
of GDP -- above the 9.5 percent the government predicted in
January 2009.


3. (U) On March 30, Prime Minister Brian Cowen indicated that
tax revenues may be Euro 2 billion (USD 2.9 billion) less
than the government predicted just a week previous, dropping
from Euro 34 billion (USD 49 billion) to Euro 32 billion (USD
46 billion). This comment came on the heels of the latest
grim economic news that output in Q4 2008 fell by 7.5
percent, year-on-year. Spending on machinery and equipment
led the way, falling by a staggering 48 percent. In all,
domestic demand dropped 10.6 percent. Recently, Cowen
started to highlight that the April 7 budget will only be the
first of five year's worth of deficit-fighting budgets and
that the "structural" portion of the deficit (i.e. the
permanent loss of tax revenues as a result of a change in the
pattern of economic activity in Ireland) may be eight percent
of GDP.


4. (C) Dan Boyle, member of the Irish Senate and Green Party
chairman and economic spokesman, told Emboffs that tax
increases would likely account for two-thirds of the
deficit-reduction plan for this year. (Note: The Green Party
is the junior partner in the ruling government coalition.
End Note) He noted the political difficulties of tackling
the spending side of the government accounts, especially
given that one-third of spending goes to social welfare
programs. Boyle said that the Green Party supports
means-testing or taxation on social welfare benefits but did
not indicate whether the government would propose such
measures. He said that the next budget would take place in
December 2009 and that it would include recommendations from
government-appointed bodies looking at how to improve the tax
code and where to cut spending.

The Opposition's Take
--------------


5. (C) On April 1, Fine Gael, the main opposition party,
presented their analysis of the budget, recommending a Euro
3.5 billion (USD 5 billion) combination of spending cuts and
tax increases. Andrew McDowell, Fine Gael's economic
adviser, told Emboffs that any more than this will "cripple
the Irish economy." He said that, among other measures, Fine
Gael recommended that the government should raise taxes on
top earners, lower VAT rates temporarily, and cut both
staffing levels and pay in the public sector. He said that
Finance Minister Brian Lenihan's conspicuous efforts to
include opposition parties in a budget solution were just
"political gamesmanship." Lenihan wants to be able to share
the blame following the upcoming draconian budget. McDowell
said the budget will be "savage" and "harsh" and that
"political hostilities will resume on budget day."


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6. (C) According to McDowell, the government will have little
choice but to cut social welfare spending. He noted that
this is politically risky because those who receive these
benefits tend to be lower- or middle-class workers who have
lost their job and are saddled with significant debt. To be
seen as taking money out of their pockets versus going after
the bankers and property developers (who are popularly viewed
as the real villains in this drama) will not play well with
the voting public. McDowell agreed that Ireland is at a
crossroads and that the country needs to decide whether it
wants a "European-style social welfare system or a low-tax
system." He said both were undertaken during the days of the
Celtic Tiger but this was no longer a sustainable model.

OK, Maybe It Won't Be 9.5 Percent
--------------


7. (C) Pat McArdle, Ulster Bank chief economist, told Emboff
that his latest forecast of a fall in Ireland's GDP of eight
percent looked optimistic based on the latest data. He
indicted it may fall nine percent depending on what the
budget looks like and wrote in a recent op-ed that a
"double-digit contraction could now be in the cards."
McArdle argued that if the government were to stick to the
pledge it made to EU officials to keep the budget deficit at
9.5 percent of GDP, such a budget "would finish an economy
which is already on its knees." Instead, he recommended that
the government should aim to come in at a deficit of about 12
percent but warned that the budget should consist primarily
of spending cuts.


8. (C) Jim Power, chief economist at Friends First, told
Econoff that he expects a &stark and dramatic8 budget. He
agreed with McArdle that the government needs to focus on the
spending side and pointed to a pay freeze in the public
sector as the way to go about doing it. Power countered the
argument that the private sector has to bear part of the
adjustment burden by noting that &the private sector has
already shed 90,000 jobs.8 He stressed that the government
and the public need to realize that Ireland cannot be reliant
on just the domestic market and that the country needs to
re-focus on exports as the road to recovery.

Comment
--------------


9. (C) In dealing with Ireland's economic problems, the job
is not finished on April 7. The government will likely lay
out a longer-term plan that will explain how it expects to
get the budget deficit down to around three percent of GDP by
2013, as agreed with the EU. The recommendations from the
Commission on Taxation and a group of "wise persons" looking
at ways to reform government spending will both be key to
this fiscal policy transformation. Politically, as McDowell
and others have pointed out, the Fianna Fail/Green Party
coalition government - which holds a slim majority right now
- may edge closer to collapse if the more unpopular measures
in the budget cause too much political heartburn for Fianna
Fail backbenchers in their constituencies. We will be
watching the political fallout from the budget closely.
FAUCHER