You could do a lot with €3.5bn – like doubling the number of teachers in our schools, or building seven state-of-the-art hospitals. You could reduce income tax by one-quarter, or bring corporation tax down. If you were feeling all Fianna Fail, you could just give €2,500 to every household in the country.

But that's not what the Government is going to do with its €3.5bn.

They are going to take it out of your pocket and give it to Irish Bank Resolution Corporation Limited, IBRC. That's the company created to wind down the assets and liabilities of the former Anglo Irish Bank and Irish Nationwide Building Society, INBS. The €3.5bn coming in Wednesday's Budget 2013 will go some way to the total of €5bn that they are due to give IBRC in 2013.

It is true that the headline figure looked at by the troika will fall by about €800m. But due to some accounting wizardry, a full €3.1bn of the €5bn to be paid to IBRC isn't included. When you add that in, the deficit will in fact grow, by a whopping €2.3bn.

So on Thursday morning, when you're poring over the papers trying to calculate how much less money you will have next year, remember this – whatever the amount, every single cent of it will be poured into the former Anglo and Irish Nationwide, to cover their losses.

How on God's earth could this be? Here's a quick reminder of what happened. Over the course of 2010, the Fianna Fail Government invented a loan from the people of Ireland to Anglo and INBS. They essentially wrote a €31bn IOU, promising to pay it to the bank and building society over the following 20 years. In 2013, we are due to make our third payment on this, of €3.1bn.

But it gets worse. Now that we 'owe' them this €31bn, we must also pay them interest. This amounts to an additional €17bn over the 20 years. In 2013, the interest payment is €1.9bn. So contained in the 2013 forecasts is a payment of €5bn to Anglo and Irish Nationwide – two dead casinos, both under investigation on numerous fronts.

We may, in time, get some of this money back. And the Government is in negotiations with the ECB on the promissory notes. It hopes to lower the payments, possibly by spreading them out over a longer period of time. We don't know how this will pan out. We do know, however, that Budget 2013, and the €3.5bn 'fiscal consolidation' coming our way, assumes the full €5bn will be paid.

This is madness. It is immoral. It is economic lunacy, and it should not be paid. I don't say this lightly. Not paying has consequences. The ECB would likely stamp its feet loudly. The troika would undoubtedly grumble. They may take actions to hurt us. So be it. There comes a point where you have to say 'stop'. Surely we have reached that point in Ireland.

One in 10 children is now living in food poverty. Unemployment is high and static – it is more than one in three for those under 25. One in eight mortgages is in arrears. Our universities are being decimated. Two-thirds of adults now have less than €100 left at the end of each month after bills are paid. Surely, at this point, political leaders are meant to say, 'We are simply not prepared to take €5bn from these same people to give to these failed banks'.

If you take this step, recovery seems possible. And there's more. To the €5bn, let's add the €1.1bn that AIB used to top up its pension fund. This €1.1bn is our money, after all. And according to the Taoiseach, it's being used to ensure that the 2,500 planned redundancies at the bank can be voluntary.

Why? It's a failed bank. And in failed companies, people lose their jobs. Harsh, but do you see the Government topping up the pension funds of other companies with your money? A small tax on financial transactions, mooted by many, including the European Commission, Labour MEP Nessa Childers and economist Paul Krugman, could raise €750m in Ireland. So between the promissory notes, AIB's pension top-up and a Financial Transaction Tax, that's over €6.8bn from the banks.

And there are other options for raising revenue. Tax exemptions amount to over €11bn in Ireland. Excluding just one-10th of this would raise a further €1.1bn. A tax on high-sugar, high-fat foods, while not to everyone's taste, could raise nearly €200m.

On the expenditure side, there are numerous options for saving money that do not lead to worse public services. In some cases, they will lead to an improvement.

The Comprehensive Expenditure Review identifies over €1.4bn in spending reductions for 2013. Just three of these measures would cut waste by over €600m. These are the better use of procurement (€150m), increases in charges for private beds in public hospitals (€270m) and better use of generic drugs (€220m). It also seems reasonable not to pay out the €170m in public sector pay increments planned for 2013.

These measures amount to about €9bn. That's with no cuts to child benefit, no household charge, no water charge, no reduction in the capital budget (for roads, schools, etc), no reduction in social welfare or income tax rates, no cuts in public sector pay.

The various pre-Budget submissions by opposition parties and civil society groups like Tasc and Social Justice Ireland contain a number of relatively low-cost ways of raising money and cutting spending. Measures like better tax enforcement and raising DIRT, capital gains and the excise on tobacco.

There are opportunities on income tax, the capital budget and high-end public service pay, and a raft of other efficiency measures throughout the public service. Between all of these, there could be another €1bn to 1.5bn. But let's leave all of them out, for the sake of simplicity. Let's just stick to our €9bn. Using €3.5bn of this to hit our troika target next year still leaves us with €5.5bn to invest.

Where would you like to start? Increase the microfinance fund from €90m to €1bn. Build a network of innovation centres for entrepreneurs. Get the next generation of broadband into the cities and ensure companies get all of it they need, affordably. Invest €1bn in our universities, reversing the decline in rankings and standards.

Get the career guidance counsellors back into our secondary schools and reduce teacher-pupil ratios. Increase support hours for students with learning difficulties and reverse the cuts to the Deis schools. Build the primary care centres. Reverse the cuts to home-help hours. Start hiring teachers, nurses and gardai again. In short – stimulate job creation, brush down the education system, support at-risk groups and reduce inequality.

We could even use some of the €5.5bn to accelerate the closing of the deficit, bringing us closer to financial independence and possibly alleviating some of the political fallout from not paying IBRC.

The difference between what I've outlined here and what's coming on Wednesday is just one thing – the banks. Leadership during crisis involves tough choices.

Right now, here they are: do we tax and cut to continue paying the debts of Anglo and Irish Nationwide, for fear of the ECB? Do we pour public money into bankers' pension funds for fear of compulsory redundancy? Do we shy away from a sensible tax on financial transactions for fear our bankers will flee to London? Or do we make a stand and begin to do things differently?

For four years now, two subsequent Irish Governments have consistently put the interests of banks and bankers ahead of the interests of the Irish people. This is down to a combination of incompetence, political cowardice and legitimate fear.

Spanish philosopher George Santayana famously said that those who cannot remember the past are condemned to repeat it.

On Ireland's predicament, history is unambiguous – an austerity-only approach to this crisis has not worked. It isn't working now. It won't work in the future.

Sadly, I expect Wednesday's Budget will show that the Government hasn't yet learned the lessons of economic history. Only by taking a stand against the banks, and against the orthodoxy of the ECB, can we disentangle ourselves from the mistakes of the past and set ourselves on a path to recovery.

Stephen Donnelly is the Independent TD for Wicklow and east Carlow

Sunday Independent