The Big Budget Gets Trashed

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Ireland Calling with John Spain

The Big Budget Gets Trashed

October 23, 2008

Ireland Calling by John Spain

IT’S the little things that get you in the end, Albert Reynolds famously said when he was dumped as taoiseach (prime minister) after he had mishandled a controversy involving a pedophile priest.

Reynolds, a successful businessman, had been working around the clock as taoiseach using his experience to improve the economy and get the peace process started in the North. But he lost power because he failed to give enough attention to a relatively minor matter.

There were moments last week when it looked like the same fate could befall the present Taoiseach Brian Cowen. Having won widespread praise two weeks ago for the way he had handled the banking crisis here, acting before other European countries, his government brought in a very tough budget last week to deal with the other crisis, the one in the state finances where the gap between tax revenue and state spending was unsustainable. Huge cuts in state spending and higher taxes were announced to cut the yawning budget deficit.

Initially that tough medicine won some support. Most reasonable people recognized that action had to be taken, that sharply declining taxes could no longer pay for the high level of state services we had grown accustomed to during the boom.

But the reluctant acceptance of the harsh budget measures was short lived. Within a couple of days, as people began to read the detail of the cutbacks, one issue emerged which prompted rebellion among Fianna Fail deputies in the Dail (Parliament) and since then has shaken the government and the previously unflappable Cowen to the core.

That issue is free health care for old people. Since 2001, everyone over 70 in Ireland has been entitled to a medical card that gives them free medical care.

Up to then, only those on low pay or welfare got the medical card. Extending it to everyone over 70 was one of several carrots given by Fianna Fail back then to help them win the 2002 election.

It was a compassionate and deserved move, since the old folk had worked and paid taxes all their lives and in that sense had earned their free medical care. In boom time Ireland, it seemed completely justified.

But like several other state schemes that operate here, the benefit was given without any means testing. So regardless of your savings, investments or income, once you hit 70 you got your free health care. It doesn’t matter whether you are business titan Tony O’Reilly (he’s 72) or Tony Homeless, you are automatically entitled to your medical card.

When the then Minister for Finance Charlie McCreevy announced this scheme back in 2001 he did so without first doing a deal with the country’s doctors. This seems stupid looking back now, but in boom time Ireland no one cared that much.

The doctors then had the government over a barrel and negotiated a very good deal for themselves, charging four times as much per year for an over-70s patient on their medical card list as they did for younger clients.

The result was the scheme cost a small fortune. And in the budget this year, facing an unprecedented deficit, this was one of many small things the government decided to change to reduce state spending.

So they announced that the automatic entitlement of the over 70s to a free medical card was to be ended and in future a means test would be applied. Those who were able to pay for medical care themselves in future would have to do so.

The threshold was set at a low level, so that even those on modest incomes or pensions were going to have to stump up. Under the changes, a single person over 70 would only be eligible for a full medical card (covering both local doctor visits and hospital stays) if their disposable weekly income from all sources was less than the equivalent of around $300. The combined limit for a married couple was around $450.

There were lots of complaints about this as soon as the budget was announced. Within 24 hours the complaining developed into a national outcry.

The papers and radio were full of it, and all over the country furious people were telephoning their local Fianna Fail politicians threatening never to vote for the party again. As one Fianna Fail member of the Dail put it, “We went from hero to zero in a day.”

Initially the government played hardball. It could not be changed, Cowen said. Some people had still not woken up to how serious the financial situation facing the country is.

Savings have to be made. The automatic entitlement to a medical card without any means test or income threshold simply cannot be sustained any longer.

But the game was up. One Fianna Fail member of the Dail resigned from the party and others publicly demanded that Cowen scrap the change. The rebellion among government backbenchers was gathering such pace that it was no longer clear the vote in the Dail on the budget would be won.

So very quickly, the hard line gave way to a commitment that the government would renegotiate with the doctors in an effort to lower costs and still keep the scheme as wide as possible. But even that was not enough to quell the revolt, and finally on Sunday Cowen announced that the changes in the free medical card scheme for the over 70s proposed in the budget would not go ahead “as they stood.”

He said the government recognized the widespread concern over the issue but needed time and space to find a solution. Any solution would have to recognize the broad parameters of the budget and include a means test, because the escalating cost of automatic entitlement was not sustainable, he said.

So on the one hand he was sticking to his guns, but on the other he was saying the changes were not going ahead “as they stood.” It was a humiliating climb-down by a taoiseach who is renowned for his bull-headed toughness.

As Reynolds knows, it’s the little things that get you. The overall budget was designed to close the deficit by a whopping *3 billion and the change on medical cards for old folk was only going to save only *100 million or so of that.

That’s a drop in the ocean of government spending. Yet last week it threatened to topple the government.

The amazing thing is that the government did not see this coming. In this column last week, written within an hour of the minister presenting the Budget to the Dail, I said, “One change that is going to cause uproar here is the abolition of the automatic entitlement to a medical card for the over-70s.”

It was obvious to me immediately that whatever the Department of Finance logic for the change, the issue was potentially so emotional it had to be political dynamite. Perhaps Cowen was so busy dealing with the banking crisis he did not see it coming.

Overall, this controversy shows just how difficult it is going to be to get people here to accept real cuts in state spending. It is just one of several state benefits that middle and high income earners get that really should only be given to welfare or low pay people. But the better off insist on getting them and feel it is their right because of the tax they pay.

Of course medical cards should be means tested. And so should children’s allowances, the substantial monthly state payments made here to parents with children.

The children’s allowances were originally designed to help poorer families meet the cost of raising kids. But everyone gets them, regardless of income. I know middle class families who don’t cash them in for months and then use them to pay for a holiday or let them accumulate for a few years, and then use them to change the car.

Given the pressure the state finances are under, that makes no sense. Minor tinkering with the children’s allowances scheme was done in this budget, but any politician who tries to introduce a means test will get the same ferocious reaction we saw last week over the medical cards for the over 70s.

Over the weekend, trade unions also lobbied Cowen to remove the 1% income levy announced in the budget from the lowest paid workers, and it looks as though the government will give in on this as well.

And another cutback announced in the budget that is provoking strong reaction — the decision to reduce teacher numbers — is also under severe pressure. This proposal will mean that many schools will lose at least one teacher and as a result may have to drop some minor courses, like Spanish or Applied Maths.

Overall, the budget — “the toughest budget in 20 years” — is turning into a leaking pot of tax money. And in the meantime, some wealthy people like Tony O’Reilly, who is a tax exile, can still get their free medical cards here if they want them.

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