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News : Irish Economy Last Updated: Oct 28, 2010 - 5:22:38 PM

Irish Budget 2011: Cowen says €15bn adjustment plan will be “somewhat frontloaded”; Yields on Irish bonds rise
By Finfacts Team
Oct 28, 2010 - 5:45:40 AM

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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 Noonan, said.

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 over-staffing
  • 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 companies
  • 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 country”.

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."

Borrowing Costs

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 Tuesday.

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 debt.

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 Wednesday his 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 in."

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 Government.

“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 car.”

Finfacts Budget 2011 Page

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