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News : Irish Economy Last Updated: Nov 25, 2010 - 6:05:11 AM


Four-Year Budget Plan: Irish fiscal austerity plan claimed to be “blueprint for return to sustainable growth”
By Finfacts Team
Nov 24, 2010 - 4:36:10 PM

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Four-Year Budget Plan: The Government today published its multi-year fiscal plan of spending cuts and tax rises to reduce the annual budget deficit to 3% of GDP (gross domestic product) by 2014. Taoiseach Brain Cowen called the austerity measures a “blueprint for return to sustainable growth.”

The plan was unveiled this afternoon by the Taoiseach Brian Cowen, Finance Minister Brian Lenihan and Environment Minister John Gormley.  It is titled ‘National Recovery Plan 2011-2014’

The Government will spend €18.5bn more this year than it will receive in taxes and that gap must be closed. The Government said it is unsustainable that Ireland would continue to borrow €2 for every €5 that it spends.

Implementation of the plan will reduce Ireland’s deficit to 3% of GDP by the end of the year 2014.

The Government has already made clear that an “adjustment” of €15bn will have to be made over the next four years. The plan confirms that €10bn will be saved by way of cuts in spending and €5bn by way of tax increases.

Tax receipts in 2010 are forecast to be 35% lower than in 2007, the Government said. The sharp fall reflected “the over-dependence on property and construction-related revenue sources during the boom years”.

The deficit will fall to 9.1% of GDP in 2011 while the national debt to GDP ratio will be 102% in 2013 and will fall to 100% in 2014.

Social welfare will be cut  by €2.8bn mainly through adjustments to unemployment benefits and child income supports; the minimum wage will drop by by €1 to €7.65; pension age will rise to 66 in 2014, 67 in 2021 and 68 in 2028; pensions for retired public sectors workers will be cut; capital spending budget will be reduced by €1.8bn in 2011;  university registration fees will rise from €1,500 to €2,000; water charges will apply when meters are installed in all homes and businesses; €1.9bn will be raised through income tax changes; a property site value tax will be introduced  in 2012.

The plan says the numbers of income earners that remain outside of the income tax net, estimated at 45%, was “unsustainable,” and it's proposed to reduce the entry point to the tax system for a single PAYE worker by €3,000 to €15,300. The standard rate of VAT will be increased from 21% to 22% in 2013, and to 23% in 2014, yielding the Exchequer €620m.

The Government plans to reduce public sector staff levels by 24,750, bringing the total back to 2005 levels. It also announced the public sector pay bill will be reduced by €1.2bn; half of the reduction in public sector staff numbers has already been achieved. Compulsory redundancies of public sector workers have been ruled out. 

The Government has also announced that the “adjustment” in the forthcoming Budget for next year - - to be delivered on December 7, in the Dáil -- will be €6bn.

According to the ‘National Recovery Plan 2011-2014’, its three main themes are as follows…

  • Sets out the measures that will be taken to restore order to our public finances.
  • Identifies the areas of economic activity which will provide growth and employment in the recovery.
  • Specifies the reforms the Government will implement to accelerate growth in those key sectors.

Read a special leaflet by going to the website www.budget.gov.ie

The plan sets out broad details of expenditure savings and broad details of taxation increases as well as details aimed at boosting growth in the economy.

The Importance of Optimism

Taoiseach Brian Cowen said he has repeatedly stressed that economic recovery in Ireland will be “export led”.

The plan makes clear that this year, exports from Ireland are expected to rise by 6% over last year. In the coming year, in terms of the current spending, we are expected to record a “small surplus”.

The plan also makes clear that “our economy is emerging from recession” and that we can “certainly be optimistic about our economic prospects”.

The cuts the Government intends to impose will bring public spending back to the 2007/2008 level.

According to the special leaflet on the National Recovery Plan 2011-2014’ the Government will…

  • Reduce the cost of the public sector pay and pensions bill, social welfare, and public service programmes.
  • Achieve savings in social welfare expenditure of €2.8bn through a combination of control measures, labour activation, structural reforms, further reductions in rates as necessary and a fall in the Live Register.
  • Cut public service staff numbers by 24,750 from end-2008 levels, back to levels last seen in 2005.
  • Overall payroll adjustments of €1.2bn by 2014.
  • Introduce a reformed pension scheme for new entrants to the public service and reduce their pay by 10%.
  • Make more effective use of staffing resources with redeployment of staff within and across sectors of the public service to meet priority needs.
  • Reform work practices to provide more efficient public services with scarcer resources.
  • Increase the student contribution to the costs of third level education.
  • Introduce a charge for domestic water by 2014.
  • Reform and update the existing budgetary architecture.

Measures including reducing the minimum wage by €1, will create 90,000 jobs during the course of the plan

According to the special leaflet on the National Recovery Plan 2011-2014’ the Government will…

  • Reduce the minimum wage by €1 to €7.65.
  • High minimum wage is a barrier to job creation for younger and less skilled workers where unemployment rates are highest.
  • Will still be among the highest rates in the EU.
  • Reform welfare system to incentivise work and eliminate unemployment traps.
  • Re-invigorate activation policies to ensure that unemployed people can make a swift return to work.
  • Promote rigorous competition in the professions and measures to reduce legal costs.
  • Take decisive actions to reduce waste and energy costs faced by businesses.
  • Enhance availability of technological infrastructure, in particular next generation broadband networks.
  • Lead efforts to reduce office rents in both the private and public sectors.
  • Increase efficiency in public administration to reduce the costs for the private sector.
  • Implement sector specific measures to assist an increase in exports as well as an increase in domestic demand.
  • Support innovation through the innovation fund and other enterprise supports and through our tax system.

What taxation measures will the Government introduce?

According to the special leaflet on the National Recovery Plan 2011-2014’ the Government will…

  • Maintain the 12½ corporation tax rate; this will not change.
  • Raise an additional €1.9bn through income tax changes.
  • Implement pension-related tax changes to yield €700m, with €240m in tax savings on the public sector pension related deduction.
  • Abolish/curtail a range of tax expenditures yielding €755m.
  • Increase the standard rate of VAT from 21% to 22% in 2013, with a further increase to 23% in 2014. These changes will yield €620m.
  • Introduce a local services contribution to fund essential locally-delivered services. This will yield €530m.
  • Increase the price of carbon gradually from €15 to €30, yielding €330m.
  • Reform Capital Acquisitions and Capital Gains Tax to yield an additional €145m.
  • Transform BES into a new Business Investment Targeting Employment Scheme.

Read the full plan by going to the website www.budget.gov.ie

Finfacts Budget 2011 Page

How Ireland's financial crisis could affect U.S. markets, with Douglas Cliggott, Credit Suisse, and Ed Keon, Quantitative Mgmt. Associates:

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