|Taoiseach Brian Cowen opening a Dáil debate on the economy, Wednesday, Oct 27, 2010.
Irish Budget 2011: Taoiseach Brian Cowen said on Wednesday that the
€15bn four-year adjustment plan beginning in 2011, will be “somewhat
frontloaded” and focus more on spending cuts than tax increases. Also on
Wednesday, the collapse of talks on a budget between Portugal's government and
the main Opposition party, spooked bond investors and yield on 10-year Irish
bonds, rose to a month's high.
Speaking in a two-day Dáil debate on the economy, Brian Cowen
said that “while a degree of frontloading may dampen economic growth in 2011”
it would given confidence to the markets and secure Ireland’s funding position,
which was “fundamental to sustaining public services for our citizens and
achieving sustainable economic growth in future years”.
Minister for Finance Brian Lenihan said the endorsement of EU
ministers, the European Commission and the European Central Bank
would be of key importance in demonstrating to the markets the
soundness and credibility of the Government’s plan. “Only last
Monday I flew to Brussels to update commissioner [Olli] Rehn on
the current economic position and on the progress being made
towards preparing Budget 2011. As a result of these contacts
with my colleagues I am confident that they all have a clear and
detailed understanding of Ireland’s position and what we intend
to do about it.”
The main Opposition parties questioned the figures on which the Government
based its call for €15bn in cuts and tax increases over the next four years to
reduce the deficit to 3% of GDP by 2014.
Fine Gael leader Enda Kenny said the Taoiseach had failed to
list a "single proposal" the Government will carry
out in the imminent draconian Budget.
However, he avoided specifics himself and challenged the
€15bn four-year adjustment, which is based on average annual
growth of 2.75% in 2011-2014.
Fine Gael says the Budget cutbacks could be as high as
€20bn or as low as €9bn depending on which annual growth
forecasts from independent experts are used.
"We are not buying in. We need more information. We
certainly need to know how the minister built up his
forecast," Fine Gael finance spokesperson, Michael
Labour Party leader Eamon Gilmore said there should be a
50:50 ratio between tax increases and spending cuts. He proposed
a number of initiatives including a three-year pay freeze; a new
tax rate for people earning over €100,000; and the reduction of
tax relief on pension contributions.
“Given the scale of the deficit we need to spread the burden of adjustment
for it to be economically or socially credible,” he said.
The Labour leader proposed the following:
- A 3% reduction in pay and non-pay costs in the public sector to save
€2.8bn over 3 years, including payroll reductions of €1.4bn. A voluntary
redundancy scheme in the public service, confined to areas of identifiable
- Negotiated pay freeze for three years
- Abolition of tax relief on trade union subscriptions
- Reduction in drug costs by €300m by using generic medicines and
further reductions through a “robust” negotiations with drug
- Cuts in pension reliefs of at least €500 m, particularly by
limiting amount individuals claim
- Abolition of all property-based investment tax reliefs
- Scrapping tax relief costing €50m on patent royalties
- Introduction of 48% tax rate for highest earners
- We also need a system whereby a minimum effective tax rate is applied to
high earners to limit the total relief that any one person can obtain from
all tax breaks combined
- Minimum effective tax rate for high earners to limit total tax relief
- Capital gains income should be subject to PRSI and levies in the same
way as earned income
- Increase tax on second homes
- Phase in water charges on metered basis
- New bank levy once capital levels in banks are adequate
- Temporary fees commission to control fees and prices in professions such
as law and medicine
- Reduce capital spending by €2.5bn over three years
- Invest €2bn from the pension reserve fund to provide capital for a
strategic investment bank to fund capital spending
- We must get away from the notion that innovation only happens in labs.
Innovation can happen in any business and in any region
- Ireland needs to do more to keep the companies that we do develop and
grow, rather than getting a start-up to a certain size and then selling the
company to a multinational.
- Schemes to create jobs which would cost about €230m in the short
term but would save money in the longer term because it would get people off
the dole more quickly
Green Party leader John Gormley said he was aware of the difficulty in
persuading people of the necessity fora radical plan when trust in the political
system had broken down. He said changes would have to be made to ministerial
transport, the salaries and expenses of TDs and Senators and the working times
and productivity of the Dáil and Seanad.
Sinn Féin Dáil leader Caoimhghín Ó Caoláin said up to €600m could be saved in the health service without cutting
patient services. He called for the “elimination of waste”
such as paying over the odds for drugs and the end of
overspending on property rentals.
Ó Caoláin also accused the
Government of caring more about bondholders than citizens.
Governor of the Central Bank prof. Patrick Honohan said last night the
deterioration in the public finances had been “worse than almost any other
Speaking to the Institute of Certified Public Accountants in Ireland
Wednesday evening, he said
the decline partly reflected the fact that the “home-grown property bubble
had risen further and so has fallen further than most”.
Prof. Honohan said the dependence on sources of tax revenue such as stamp
duties, capital gains tax and corporation profits tax made total tax revenues
dependent to an exceptional degree on profitable economic conditions, high
transactions in the property market and asset price appreciation (Chart 2). He
said all tax systems tend to do better in such conditions, but the elasticity of
tax revenue response to a return to more normal conditions was exceptionally
high in Ireland.
He said: "Of course tax revenues have slumped, and expenditure has soared
in all of the countries affected by the global downturn of 2008-9 and the slow
recovery that is now in process. (The taxes and spending programmes that behave
in this way are normally seen as stabilizing, and indeed are called the
automatic stabilizers.) But the deterioration in Ireland’s fiscal position has
been worse than almost any other country.
Partly of course this reflects the fact that Ireland’s home-grown property
bubble had risen further and so has fallen further than most (Chart 3). But it
also reflects the heightened elasticity of the tax receipts. Interestingly,
when you plot tax and current expenditure as a percentage of GDP, you might miss
this, masked as it is by the scale of the collapse in GDP – tax
receipts fell even faster despite big increases in rates and base especially in
income tax as the Government tried to make up for the shortfalls elsewhere. That
is one of the main reasons why Ireland’s exposed fiscal position, with which the
Government has been struggling for the past two and a half years and which will
be the subject of intensified corrective action to be set out in detail in the
promised 4 year fiscal programme to be announced shortly, is so exceptional."
Irish bond yields rose Wednesday on news of the collapse of Portugal’s budget
discussions and Greece’s tax revenue shortfalls reignited worries that
peripheral European countries may struggle to reduce their deficits.
The yield on Ireland’s ten-year bonds closed at 668 basis points (6.68%), the
highest level in almost a month, while the yield spread between Irish sovereign
debt and the benchmark German bund rose to 412 basis points, up from 393 on
When investors sell Irish bonds, the price falls and the market interest rate
rises. For example a €100 bond has a fixed interest rate or coupon, which dates
from the issue. When the price falls below €100, the yield rises.
Greece’s 10-year yield rose 79 basis points, the most since June and its
spread with bunds widened to 779 basis points.
Greece is now expected to run a budget deficit for 2010 greater than the 8.1%
of GDP that was agreed as part of the EU/IMF rescue package.
A deficit of 8.9% may now be the outturn
according to reports.
Greece's 2009 deficit was revised up to 15.5%
from the 13.5% initial estimate.
Investor fears that the Greek government will
struggle to narrow the gap and Greece may
ultimately be forced to restructure its public
The yield on Portugal's 10-year bond rose 24 basis points, the most since
September 20th, to 593 points (5.93%).
State Mercs and Perks
Speaking after Minister Mary Hanafin committed her Government to keeping the
ninisterial car fleet, "while preparing the toughest and most painful Budget
in Irish history," Fine Gael Transport Spokesman Simon Coveney said
party would abolish the automatic right to ministerial cars.
Hanafin told RTÉ Radio'sMorning Ireland that
the reason Cabinet members arrived separately at Farmleigh and Government
Buildings this week was because "it wasn’t possible that everyone would
arrive in the one bus," and "there was no other way of people getting
Deputy Coveney described this is a "farce" and said Fine Gael would
abolish the automatic right to a ministerial car and bring in car pooling as
part of its forthcoming proposals to transform the public sector - - Reinventing
“The sight of every Cabinet member arriving in their own limousine, while
preparing Ireland’s worst ever Budget, sent out a clear message to the general
public. It confirmed that this Government has lost all touch with reality, and
fails to understand the need to lead by example in cost-cutting measures.
“The cost of running the State cars for the last two years comes to a whopping
€11 m. It includes 54 Gardaí who have been taken off the beat in order to
drive Government officials around the country.
“There can be no sacred cows in this crisis. That is why Fine Gael will
introduce a car pooling system, where State cars are available at short notice
with security-cleared drivers. Garda drivers will be provided to An Taoiseach,
the Minister for Justice and in other necessary circumstances. But all ministers
will be encouraged to take public transport or make use of their own personal
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