How much will the Irish Budget actually save?

December 7, 2010

I promise to get back to enterprise soon but with today’s Irish budget being the topic of the day I wanted to point out the futility of the exercise. The Irish government wishes to save €6 billion today; roughly €2 billion in tax hikes, €1.8 billion in reduced capital spending and €2.2 billion from reduced day-to-day spending. So how much will they actually save in real terms today: €722 million or less than three-quarters of a billion euros.

Don’t believe me, then let’s do the maths:

Expected government spending in 2011 €52 bn
Pre budget expected tax take €33 bn

Pre budget shortfall for day-to-day spending €19 bn

Government budget adjustment € 6 bn

Post budget borrowing for day-to-day spending €13 bn

So, how much is it going to cost to borrow €13 billion? Well, we now will borrow from the ECB/IMF fund at 5.8% over 7 years or a total interest to be paid of 40.6% over the time of the loan.

Interest payments on €13 bn from IMF/ECB Fund € 5.278 bn

Intended Government adjustment € 6 bn

Real saving from budget € 0.722 bn

Put another way, the interest payments on the money we still have to borrow almost makes up the amount of savings and tax increases made in the budget. It is a classic crowding out effect and demonstrates what happens when try to deal with serious fiscal and economic crises in a bit-piece manner rather than dealing with the real problems properly. All that the budget today will achieve is a short-term cash-flow benefit in 2011 as we will pay the loan back over 7 years but what appears completely lost on those advocating this piecemeal approach is that it will become a negative cash flow effect on the budgets in 2012, 2013, 2014, 2015, 2016 and 2017.

And we wonder why the bond markets are not taking the budget seriously?


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