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Cablegate: Ireland: Predictable Budget/Unpredictable Finance

VZCZCXRO2819
PP RUEHDBU RUEHFL RUEHKW RUEHLA RUEHNP RUEHROV RUEHSL RUEHSR
DE RUEHDL #0538/01 3441637
ZNY CCCCC ZZH
P 101637Z DEC 09
FM AMEMBASSY DUBLIN
TO RUEHC/SECSTATE WASHDC PRIORITY 0365
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEHBL/AMCONSUL BELFAST 1130

C O N F I D E N T I A L SECTION 01 OF 02 DUBLIN 000538

SIPDIS

TREASURY FOR VIMAL ATUKORALA

E.O. 12958: DECL: 12/10/2019
TAGS: ECON PREL PGOV EFIN EI
SUBJECT: IRELAND: PREDICTABLE BUDGET/UNPREDICTABLE FINANCE
MINISTER COMMENTS

DUBLIN 00000538 001.2 OF 002


Classified By: DCM Robert J. Faucher. Reasons 1.4(b/d).

1. (C) Summary: On December 9, the Irish government delivered
its 2010 budget. Looking to save at least four billion Euro
(USD 6 billion), the government had signaled for months that
public sector pay and social welfare would make up a large
chunk of the spending cuts and there were no great surprises.
The 2010 budget is widely perceived as the most draconian in
decades. It calls for USD 86.9 billion in spending and
anticipates USD 54 billion in revenues, leaving a deficit of
USD 32.9 billion. The only notable tax change was the
expected imposition of a carbon tax. Finance Minister Brian
Lenihan said that the economy has, "turned a corner," and
that, "(this budget)is going to be the last of the very
difficult budgets." The opposition attacked both Lenihan's
comments and the government's social welfare cuts. Most
commentators we have spoken to or who have commented publicly
expect even more difficult budgets over the next several
years. Lenihan's remarks will make next year's budget even
more difficult to sell to the voter. End Summary.

Spending Cuts Predominate
-------------------------

2. (SBU) The Irish government "softened up" (as one of our
contacts put it) the Irish public for the harsh budget by
commissioning two independent bodies to recommend spending
cuts and tax increases. The recommendations have been
debated for months now so the announced spending cuts were no
surprise. The key cuts amounted to around USD 6 billion (a
little over two percent of GDP) and included reductions in
public sector pay (USD 1.5 billion) and social welfare
payments (USD 1.1 billion), with the remainder coming from
capital spending cuts and other line-item current spending
cuts. Public sector employees will face paycuts of five to
15 percent.

3. (C) As called for by private economists and the business
community, the Irish government included very few tax
increases. Rossa White, chief economist at Davy's
Stockbrokers, told Econoff that the net tax increases totaled
an almost negligible USD 25 million. The main tax change was
the introduction of a carbon tax of USD 22.50/ton which will
increase gasoline and heating fuel prices mainly. In an
effort to revive the economy, the government is focusing on
competitiveness -- both a reduction in the general price
level and retaining and attracting globally mobile foreign
direct investment. Raising marginal income tax rates or the
now sacrosanct 12.5 percent corporate tax rate would have run
counter to this push.

Minister Lenihan Creates a Target...
------------------------------------

4. (C) In the past two days Finance Minister Lenihan has said
that the economy has, "turned a corner," and that, "(this
budget)is going to be the last of the very difficult
budgets." Local economist Constantin Gurdgiev (and others we
spoke to) told Econoff that both of these statements fly in
the face of reality. By his calculations, the government
will have to "find" at least an additional USD 21 billion
over the next three budgets to come under the EU limit of a
three percent of GDP deficit. He estimated that the
structural deficit (that part of the deficit that will not
disappear with an improved economy) is between five and eight
percent of GDP. In a lunch last week with the Ambassador,
Jim Power, chief economist at Friends First, said that he
does not expect economic growth to return until at the
earliest 2011. In a conversation with Econoff, Power echoed
a point Gurdgiev made that the government's trend growth
projection of 3.75 percent over the next several years is
"wildly optimistic." If growth does not reach these levels,
the government will have to cut more.

... and the Opposition Takes Aim
--------------------------------

5. (SBU) Having gained some, but not enough, political
advantage over the last several months from haranguing the
government on the economy and impending budget, the
opposition's reaction to the budget announcement focused on
Lenihan's comments about this being the "last" difficult
budget. According to press reports, Fine Gael finance
spokesman Richard Bruton dismissed the idea that the worst
was over and pointed out that an office cleaner in the
Finance Department would take a larger proportionate pay cut
than Lenihan. Labour Party leader Eamon Gilmore described
the announcement as, "a scam designed to mislead the public."
Even Green Party leader John Gormley, whose party is a

DUBLIN 00000538 002.2 OF 002


junior partner in the government, could only offer tepid
support saying, "given the difficult choices we had to make,
I believe it is, in the main, a fair budget."

6. (C) On December 10, PolOff spoke with Mark Garrett, Chief
of Staff for the Labour Party who noted that "there is a
disconnect between the media and the public. The media has
taken a "pain is necessary" stance, but the public is
disenfranchised. Ireland isn't France and there won't be
rioting in the streets, but there is a strong likelihood that
this will manifest itself in the political arena." Econoff
spoke with Andrew McDowell, Director of Research for Fine
Gael, who said that "there were no great, visionary ideas,
despite what was signaled in the McCarthy report. Not one
state agency was abolished." He added that the budget did
not set out a, "new plan for the economy or public sector
reform."

Unions Threaten Action
----------------------

7. (C) The unions are less than pleased with the budget and
are calling for strikes in response. Peter McLoone, head of
the largest public sector union, Impact, warned the
government that his 350,000 members would now prepare for
industrial action. McLoone said that the government's
intention to cut the link between public sector pay and
pensions meant that the government had decided to "walk away"
from the social partnership arrangement. (Note: the social
partnership is the process of negotiation between employers,
unions, and the government on employment-related issues. The
process contributed to the revival of the Irish economy but
many now question its relevancy. End Note.) Garrett
suggested that the reaction would be much less severe. He
noted that there is unlikely to be an additional walkout as
the public sector is smarting from the salary reduction and
most aren't eager to lose additional days of pay. Garrett
added that union members will likely react by not cooperating
with proposed reforms and creating other difficulties at the
local level.

Comment
-------

8. (C) There was never really any mystery about what would be
in the budget. The governmentdid a good job of signaling
its intentions early on and allowing the public to come to
grips with the reality over time. What is a mystery is why
Lenihan would issue the statements on a rebound in the
economy and the end of the tough budgets. It is hard to find
someone who agrees with him and it is likely that next year's
budget will be even more difficult. Whether it was bad
speechwriting, a slip-up, an attempt to kick-the-can down the
road, or something else, the opposition will surely reference
these comments next year in the lead up to Budget 2011. That
said, we expect the budget announcement to have little
political impact on the government coalition and we do not
expect the unions will force a walk-back on public sector pay
cuts. The government has no other "less bad" option.
ROONEY

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