|Bank of England
Irish Budget 2011: Further cuts in public servants' pensions and welfare costs are under
consideration the Minister for Finance Brain Lenihan said in an interview with
Bloomberg TV in New York on Monday.
Brian Lenihan said that any increase in the country's comparatively low 12.5%
corporate tax rate isn't in the works, calling it a "centerpiece" of
Ireland's industrial policy.
"Were we not to have that policy, there's no guarantee that corporate tax
receipts would actually increase," he said, arguing that tax inflows could
even decline if companies left the country.
"We have already published legislation for reduced pensions for new
entrants, but we may have to accelerate pension reform more broadly," he
said. This, along with changes in wage, transfer payments and further welfare
overhauls beyond those already implemented are "on the table," Lenihan added. Irish Finance Minister Brian Lenihan who was in
the US at the weekend for the IMF-World Bank annual meetings, discusses the
outlook for his country’s budget deficit and economy: Lenihan speaks
with Margaret Brennan on Bloomberg Television’s “InBusiness.”
Irish public sector pay/pensions to rise 16% in period 2005-2010; Pay up 11%:
Pensions up 66%; Pensioner numbers rise 43% to 103,400
C&AG 2010 Report; Net cost of new Irish public pension entrant is 19.5% of
salary; Net cost of additional 1 year service for ministers/ judges is 62% of
C&AG says accrued liability for Irish public pensions is €129bn
Irish taxpayer to provide €1bn bail-out of FÁS and university pension funds
The Economic and Social Research Institute (ESRI) is holding its annual
Budget Perspectives conference today in Dublin.
Summaries of papers below: The Stability and Growth Pact: A Fiscal Framework
Whose Time has Come?
Since the onset of the current economic and
financial crisis, budget deficits and debt ratios
have risen sharply and to worrying levels in many EU
Why did the Stability and Growth Pact not avert
One reason is that the Pact’s rules were not
enforced strictly enough before the crisis struck.
Another is that analytical errors resulted in some
countries (Ireland and Spain in particular) being
deemed to have observed a key rule (that pertaining
to the structural budget balance) when this was far
from being the case. These reasons point to failings
of fiscal governance.
A third reason has to do with the sheer severity
of the crisis which had its origins outside the
fiscal realm in excessive credit creation and the
development of broad macroeconomic imbalances. This
points to a failure of broad macroeconomic
As part of its response to the crisis, the
European Commission has put forward a set of
proposals the purpose of which is to strengthen
fiscal and macroeconomic governance across the EU.
These proposals if adopted will entail much more
detailed and extensive scrutiny of member states’
macroeconomic policies and performance, a greater
degree of coordination of policies, and the more
vigorous deployment of sanctions and incentives to
ensure compliance with rules.
The proposals envisage greater emphasis being
placed on the 60% debt/GDP ratio as a target of
fiscal policy, and signal much less tolerance for
high debt ratios than has prevailed in the past.
They indicate that consolidation will be the
watchword for fiscal policy across the euro zone
well into the future and presage a trend towards
greater uniformity of fiscal outcomes amongst member
states. They also suggest that the aversion towards
counter-cyclical fiscal policy, which has been a
feature of the euro zone since its inception, will
remain in place.
|Table4: Deterioration in Public Finances, 2007 - 2009
* Important disclaimer: This paper was written
when the author was a Senior Fellow of the
Economics, Finance and Accounting Department at
NUI-Maynooth. The opinions expressed are entirely
personal and do not reflect the views of the Irish
Department of Finance where the author now works.
Fiscal Policy: Some Lessons from Crises of the
Joe Durkan (UCD)
Irish fiscal policy has mostly been pro-cyclical,
tending to boost the economy in good times and
withdraw or reverse the stimulus during economic
downturns. Joe Durkan, in a paper to the Budget
Perspectives Conference, explains why and then
suggests mechanisms to reduce the danger of
pro-cyclical policy in the future. There is no
singular reason why policy has been pro-cyclical,
but bad forecasting and poor analysis lie behind
many of the policy mistakes. When the economy has
grown above expectations and the public finance
position has improved government has tended to
regard the new situation as normal and increased
expenditure and/or reduced taxes leading inevitably
to retrenchment when the economy slows down. Or, as
in the 1970’s, fiscal policy was used to stimulate
an economy in an upturn, leaving no room for
manoeuvre in the downturn and creating a fiscal
One proposal for improving fiscal policy is the
creation of an advisory body, a Fiscal Council,
which would set the scene for medium term fiscal
policy, examine government fiscal proposals, and
monitor outcomes. This paper accepts that such a
group would be helpful, but suggests that a further
improvement could be made to fiscal policy by
reducing the extent to which the budgetary situation
improves when the economy grows above potential by
introducing other forms of taxation, such as
property taxation, and by reducing the elasticity of
the income tax system by reducing marginal tax rates
relative to average tax rates. Both of these
measures would reduce the effect on the budget of a
spurt in economic activity. A “rainy day” fund would
also mean government would have more flexibility for
dealing with sudden shocks, as in the current
Finally the paper suggests that the tax system
favours private individuals holding their wealth in
the form of housing and pension funds-assets that
are very illiquid. Individuals should be encouraged
to hold “rainy day” assets to meet downturns in
economic activity and not to be so reliant on state
Restructuring Taxes, Levies and Social
Insurance: What Role for a Universal Social Charge?
Tim Callan (ESRI), Brian Nolan (University
College, Dublin), Claire Keane, John R. Walsh, and
Marguerita Lane (ESRI).
New economic realities mean that Ireland’s system
of taxes and social insurance needs a radical
overhaul. During the boom, taxes on income were
reduced below sustainable levels. Emergency levies
have been effective in raising substantial revenue,
but the overall structure of taxes on income now
lacks coherence. Government has proposed a
restructuring of PRSI and levies into a new
“universal social charge”, as flagged in Budget
2010. The ESRI tax-benefit model has been used to
explore how this might be done, and the implications
for families at different income levels.
Key findings include:
- A new universal charge of 7½ per cent could
bring in enough revenue to replace PRSI, the health
contribution and the income levy.
- Compared to the “pre-crisis” situation in 2008,
this would be progressive, with the burden falling
largely on higher income families.
- Compared to the current situation, there would
be gains for those on top incomes - because the
current situation includes the strongly progressive
emergency measures. The top effective tax rate in
the current system is 52 per cent, made up of the
top income tax rate of 41 per cent and levies/health
contribution of 11 per cent.
- The proportion of Irish taxpayers facing the
top tax rate remains stubbornly high - despite a
long-standing policy objective of reducing the
numbers facing these rates.
- A key issue is how the income tax system itself
might be restructured – both in terms of tax rates
and bands, and in terms of the range of reliefs
discussed by the Commission on Taxation.
- Finally, the implications of such a
restructuring for entitlement to social insurance
benefits need to be carefully considered.
- Speaking at the conference, Professor Tim Callan
said “A strategic approach to reforming direct taxes
is needed as part of the new long-term plan for the
The Sustainability of Irish Health Expenditure
Aoife Brick and Anne Nolan (ESRI)
In 2009, public expenditure on health in Ireland
amounted to €15.4bn, an increase of over 100 per
cent in real terms on the level in 2000. Concerns
over the sustainability of public health expenditure
are not new, nor unique to Ireland. In a paper to be
presented at the ESRI/FFS Budget Perspectives
Conference on 12th October 2010, Aoife Brick and
Anne Nolan of the ESRI analyse a number of issues
associated with the sustainability of Irish health
expenditure over the last decade.
They found that:
- While Ireland spent a similar proportion of
national income on health as other EU and OECD
countries in 2007, the recent decline in national
income has meant that this ratio has increased
sharply in the last two years.
- The proportion of public expenditure devoted to
health in Ireland has remained relatively stable
over the last decade.
- Shifting the cost of health services to
patients (via increased user charges) may reduce the
exchequer cost of healthcare but it does not ensure
long-term economic sustainability.
- Sustainability is best maintained by the
continued implementation of measures which seek to
enhance efficiency (e.g., increased use of day case
surgery) and reduce input costs.
One of the fastest-growing components of public
health expenditure in Ireland is expenditure on
pharmaceuticals and payments to community
pharmacists, which amounted to €2.1bn in 2009 (or
13.6 per cent of total public health expenditure).
The authors assess recent policy developments in the
- Amendments to the pricing and reimbursement of
pharmaceuticals in Ireland since mid-2009 (e.g., the
reduction in the wholesale and retail mark-ups) are
a positive development. Further innovations could be
considered (e.g., tendering for sole supply
- To date there have been few attempts to manage
the increasing volume of products (e.g., via
clinical protocols on prescribing).
- Based on international evidence, the recently
introduced 50c charge per item for GMS patients is a
poor mechanism for reducing the volume of
prescriptions, with potentially negative
implications for patient health and future
ESRI conference papers (one pdf file)