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News : Irish Economy Last Updated: Oct 13, 2010 - 8:05:07 AM

Irish Budget 2011: Lenihan tells Bloomberg TV cuts in public servants' pensions and welfare costs "on the table"
By Finfacts Team
Oct 12, 2010 - 7:00:24 AM

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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.”

Finfacts articles:

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 salary

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? 

Jim O’Leary* (NUIM)

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 member states.

Why did the Stability and Growth Pact not avert these outcomes?

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 governance.

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 Past

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 crisis.

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 crisis.

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 support.

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 public finances”.

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 area:

  • 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 contracts).
  • 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 sustainability.

ESRI conference papers (one pdf file)

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