How to fix the budget in two easy steps & be unpopular

minister of finance - don't worryWe have a deficit, we don’t have the money required to run the country and that means we are in a hole. In July we told that it was €5.5bn Euro, that was up from the €3.1bn we were told about early in the year, the latest figures are saying it now stands at €9.4 bn, thus it has trebled. The politicians are asking ‘why don’t banks know what is and isn’t on their balance sheet so they can plan?’… It seems we could ask them the same question and they didn’t even get into shadow leveraged products!

It is unfair to blame Brian Lenihan, he merely inherited a broken machine, the blame game is a futile process in any case, the solution game is a much more productive and meaningful one. Today we will consider the two known solutions for deficit situations, they are not ‘high finance’, anybody will grasp these concepts. The issue will be about two things, firstly will our leaders have the courage to face up to what must be done, and secondly, will the people of Ireland accept these decisions?

Solution 1: Cut spending – this is not popular but it is required (more on this later in the post)

Solution 2: Increase taxes – this is even less popular but it is one of the only ways the government can get un-borrowed money into the system. The fastest and most efficient method is to raise personal income taxes.

irish economy performanceThe solution to getting out of a hole? Stop digging… Rhetorical, but vital to understand when you are tempted to complain about cuts in public spending or tax increases. The thing that we must remember is that we elect government officials, and they must come up with solutions on our behalf, those solutions often rest on our shoulders, and more tax is the answer. The paradox is ‘do you want results but without having to go through what is required to get those results?’. Often the question is no prhased like this but the reaction to tax increases is.

Public spending is also an issue, we are seeing the demise of quangos by the bucket load, but as with FDR‘s ‘New Deal‘ a flow of money is required to keep things going, what kind of money and on what kind of things? I would argue that health comes first, then education, after that it goes down the line of infrastructure etc.. From a purely stimulative standpoint healthcare is a cost that never realises a profit, from a national standpoint good health care is the basis upon which we have a society that can survive and then go on to get a good education and enter the workforce.

do you understand the bailoutHow much? How long and how deep will the reform have to be? The answer is glaringly obvious, the deficit is €11 billion (you may be asking – it was only 9 billion at the start of the article? what happened! – well, basically when I started the article that was the figure, now [a few days have passed] its officially at 11) we have to get that money from somewhere.

The answer is higher tax and less spending to the point which is as severe as it can be done without breaking the machine. The deficit arrived in one year but it wasn’t formed in one year, rather this has been coming for a while and we won’t fix it in one year, however, a lack of tenacity by politicians at a time like this, or any effort to soothe frayed nerves in certain sectors is an error and one that will be dearly paid for.

We don’t like the idea of increased taxes any more than the next person, it doesn’t mean it isn’t the answer. If you have gangrene in your arm you probably wouldn’t like the prospect of an amputation but the solution is equally apparent. The emergency budget on the 14th will likely have some nasty surprises for many of us, especially in the finance industry who are so central to the current economic woes, but this is part of the cleansing process and it is not refined to Ireland alone, there are simply no easy answers.

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