Budget 2009: A budget destined to deflate

Peter Connell: Over the past few weeks, the debate regarding the scale of the fiscal deficit that the government should aim for in today’s budget has been joined by economists and commentators of all persuasions. They seemed to range from those like Brian Lucey of TCD on the one hand who, on Monday night’s Questions and Answers seemed to argue for a package that would take €6 to €9 billion out of the economy, through to those on the left arguing for a smaller correction such as the Labour Party’s €2.8 billion package, and those arguing for a stimulus package mirroring policies in many other developed countries.

Seen in the context of this range of views, today’s budget with spending cuts and tax increases adding up to €3.3 could be viewed as falling somewhere in the middle. Quite a few commentators this evening are suggesting that the government may have got the balance more or less right by avoiding excessively deflationary measures and have avoided ‘killing the patient’.

That, I think, remains to be seen. A cursory examination of the projected impact of the tax increases (and cuts to the Early Childhood Supplement scheme) on low and middle income families presented on the Department of Finance website suggests that consumer spending is destined for further very sharp falls in the coming months. We know that about 35% of all income is earned by those earning between €20,000 and €40,000 a year. And we can be pretty sure that most of that income totalling about €37 billion is spent – on food, rent, mortgages, clothing, transport, household goods. A married couple, one in employment with two children under 5 and an income of €30,000, will have over €100 a month less to spend from May onwards – assuming the earner doesn’t loose their job due to the deflationary spiral this budget seems destined to exacerbate.

On that basis the Minister for Finance shouldn’t be surprised if his tax take from VAT and Excise turns out to be rather less than he anticipates.

Posted in: Economics • Economics • Politics • Fiscal policy • Taxation

Tagged with: stimulus • public spending • budget • consumer spending • taxation