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Irish Budget 2010: Pre-Budget Outlook says "worst of...decline may have passed"; Taxes back to 2003 levels - - current spending up 70%+
By Finfacts Team
Nov 13, 2009 - 5:04:15 AM
Irish Budget 2010: The Minister for Finance on Thursday published the Pre-Budget Outlook report, which says "the worst of the decline may have passed." Taxes are back to 2003 levels while current spending is up more than 70%.
The report says given the very substantial contraction in living standards that we are experiencing, the public finances will be under pressure for the foreseeable future. The normal cyclical improvement in the economy over the medium term will not be sufficient to eliminate the gap between revenue and expenditure because of the narrow tax base and the fact that the tax content of export-led growth is less than that of domestically-driven growth.
"In other words, a large part of the deficit is permanent, or structural, and will not be eliminated without action. This is why expenditure-reducing measures and revenue-raising measures have been necessary and why further adjustments are essential," it says at the outset.
Current expenditure, which is estimated to stand at around €56 billion in 2009, encompasses three areas of broadly equal weight: the public service pay-bill, social welfare spending and programme spending.
It is now expected that taxes in 2009 will be in the region of €32 billion, around €2 billion below target. They are back at 2003 levels, while current expenditure has increased by over 70 per cent since then and the Exchequer deficit is forecast to be in the region of €26 billion this year.
With tax revenue in 2009 at €32 billion, this represents a decline of over 30 per cent on the level of taxes received in 2007.
In 2006, €7.2 billion was collected from capital taxes, almost 16 per cent of total tax revenue in that year. In 2009, it is estimated that about €1.5 billion will be collected from capital taxes, representing less than 5 per cent of total taxes. It is not expected that a resumption of the economic cycle will restore the previous levels of capital taxes. Therefore 95 per cent of tax receipts are accounted for by four tax heads - - VAT, Income Tax, Excise Duties and Corporation Tax.
The report says GDP is projected to decline by 7.5 per cent this year, a figure which is broadly in line with forecasts published in the April Budget.
Economic activity is projected to decline at a more moderate rate next year - - probably by around 1.5 per cent -- although the report says annual growth is expected to turn positive during the second half of the year.
Growth of 3.5 per cent is forecast in 2011; 4.5 per cent in 2012 and 2013.
Last week, the European Commission forecast growth of 2.6 per cent in 2011.
Also last week, UCD economist Colm McCarthy, told a meeting of the Fianna Fáil parliamentary party that when the Consumer Price Index (deflation) of minus 4.4 per cent was taken in account, the real growth in State spending this year has been 11.5 per cent, higher than in any other year in this decade, including 2001, when it was over 11 per cent.
“In real terms, after inflation, spending has never been less than 43 per cent since 2000,” he said. “The cumulative increases have been enormous . . . and under all headings.” He said that the share of gross national product being spent by Government had now returned to 1980s levels.
Annual deflation was reported on Thursday as having dipped to 6.6% in October - - see link to story, in Related below.
Unemployment will peak at 13.75 per cent and Fine Gael finance spokesman Richard Bruton said the Government is expecting a further 72,000 job losses next year.
A General Government Balance of the order of -12 per cent of GDP is likely in 2009. The National Debt is forecast to increase from €50 billion at end-2008 to an estimated €76 billion by end-2009.
By 2010, one euro in every six collected in tax will go on interest payments on debt - - a return to the situation in the mid-1990s.
"If no corrective action is taken the deficit is likely to rise to around 14 per cent of GDP in 2010. However, the Government has stated its intention to introduce measures in Budget 2010 that will stabilise the deficit at the 2009 level. The forecasts contained in this document are the current working forecasts of the Department of Finance and will be updated in light of further economic and fiscal data as well as taking account of the specifics of policy measures announced on Budget day," the report says.
The following statement was issued today by the Minister for Finance, Brian Lenihan, T.D:
The Department of Finance today published its Pre-Budget Outlook in which the Irish economy is projected to contract by 1½ per cent next year following a decline of 7½ per cent this year. The 2010 forecast is an improvement from the April forecast of just under a 3 per cent contraction. Unemployment is forecast to peak at an average of 13¾ per cent of the labour force in 2010. This forecast is lower than the 15½ per cent rate contained in the April Supplementary Budget. But the downward revision leaves no room for complacency. The creation and protection of jobs remains the overriding objective of government economic policy. The Government’s planned €4 billion adjustment to the public finances in the forthcoming Budget is forecast to result in the General Government Balance stabilising at -12 per cent of GDP next year.
Commenting on the projections, the Minister for Finance said:
“The last year or so has been exceptionally difficult for us all. And there are significant challenges ahead. But I am pleased to note that the outlook for the economy is now improving. The consensus now is that positive growth will return during 2010, although it will be 2011 before we experience positive growth for the year as a whole. My Department’s Pre-Budget Outlook outlines the emerging macroeconomic and fiscal outlook for the coming years.”
The Minister said the Pre-Budget Outlook sets out three preconditions for a return to sustainable economic growth:
(i)Restoring order to the public finances over the coming years;
(ii)Regaining international competitiveness to copper-fasten a return to solid employment growth; and
(iii)A properly functioning banking system.
“In all three areas the Government has taken decisive and effective action. And we will continue to take decisive action by taking the necessary and difficult decisions in the Budget next month. Our resolve as a Government to do the right thing has boosted international confidence in
Ireland. Without international confidence, our economy will not recover. There is light at the end of the tunnel but any deviation from the path that we have now embarked upon will quench the emerging recovery. ”
The Minister stressed his determination to stabilise the budget deficit in order to limit the increase in public debt, restore confidence in our public finances and stop the drain on scarce resources by an ever-increasing interest burden.
“I welcome the broad support for the need to make an adjustment of €4 billion next year because taking decisive action now will bring immediate benefits to our economy.
Now is the time to stabilise the deficit: falling prices and lower interest rates are cushioning the impact of the necessary adjustments on families. The decline in prices this year and the prospect of a further – albeit more modest- decline next year is restoring our international cost competitiveness. Nominal income levels must be seen in the context of declining prices.
The Government is determined to build on the corrective measures we have already taken. Preparation for the budget is well advanced and let me say once more that the scope for further taxation increases is limited; the bulk of the required adjustment will come from expenditure savings. In taking action we are sending a clear positive message to households as well as to the wider international community that we’re determined to restore order to our public finances.
I look forward to the debate next week in Dáil Eireann on the Pre-Budget Outlook, which will be carefully considered by the Government in its budgetary decisions.”
Finally, in response to developments at the European level, the Minister said:
“I welcome the report published by EU Commission yesterday which concluded that
Ireland has taken effective action to address the fiscal deterioration and its proposal for a one-year extension for the correction path in recognition of the deterioration in the public finances this year. At the December Ecofin Council, EU Finance Ministers will decide on this matter in the context of their consideration of the one-year extensions for certain other Member States.
This proposed extension, while easing somewhat the adjustments required in the later years, does not change the focus of our need to stabilise our very large deficit. If anything, it reinforces the need to continue to take effective action in 2010.”
